IFC Review 2010

The definitive guide to global wealth management and international financial centres

2010

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3

IFC Review • 2010

EDITOR

Ciara Fitzpatrick ciara@ifcreview.com COMMISSIONING EDITOR

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S E C T I O N 1 : G LO B A L OV E RV I EW 7 Editor’s Note………………………......……….…......Ciara Fitzpatrick 9 International Financial Centres: Good for the Global Economy?

................................................................................................Richard Hay 11 A Regulator of Repute........................................................... Marcus Killick 13 Taking Forward the G20 Tax Transparency Agenda............... Jeff rey Owens 15 OFCs and Clients of the Future............................................... L Burke Files 18 Liechtenstein Disclosure Facility............................................... John Carrell 21 Brussels IV – the Draft EU Succession Regulation.......... Michael Parkinson 23 Asset Protection in the United States............................ Prof Denis Kleinfeld 26 Practical Guide to Domestic and Foreign-Based Asset Protection Techniques

........................................ Howard S Fisher, Esq & William K Norman, Esq 30 International Philanthropy: What has Changed Over the Last Twelve Months?

................................................................................................ Clive Cutbill 32 Asian Regulation in the Year of the Tiger: Pussy-Cat or Man-Eater?

.................................................................................................. Alan Ewins 35 Trust Planning in Asia......................... Mary Ellen Hutton & Philip Munro 37 Refl ections on the Trust and the Future................... Nigel Goodeve-Docker 39 Shari’a Trusts: Lessons from the Alhamrani Case in Jersey....... Toby Graham 41 Dubai – Asset Holdings and Succession Issues......................... Caroline Rao 43 A New Dawn for Alternative Assets................................. Ravi Bulchandani 45 Th e Alternative Investment Fund Managers’ Directive......... Peter O’Dwyer 49 Central and South America: Geopolitics and the Burden of History

........................................................................................ Derek Sambrook SECTION 2: THE JURISDICTIONS 52 Antigua.......................................................................... Brian Stuart-Young

Fact File supplied by Global Bank of Commerce, Ltd

56 Austria........................................................................................ Erich Baier

Fact File supplied by Bilanz-Data Wirtschaftstreuhand GmbH

60 Bahamas............................................................................... Wendy Warren

Fact File supplied by Bahamas Financial Services Board

63 Barbados...................................................................... Trevor A Carmichael

Fact File supplied by Chancery Chambers, Barbados

66 Belize................................................................................... Gian C Gandhi

Fact File supplied by International Financial Services Commission of Belize

70 Bermuda.................................................................................. Laura Semos 72 Bermuda...................................................................... Greg Wojciechowski

Fact File supplied by Ministry of Finance, Bermuda

75 British Virgin Islands.................................. Richard Evans & Tameka Davis 77 British Virgin Islands................................................................ Sherri Ortiz

Fact File supplied by Conyers Dill & Pearman

80 Cayman Islands................................................ Mark Lewis & Ingrid Pierce

Fact File supplied by Walkers

Contents

Contents

5

IFC Review • 2010

Fact File supplied by Chrysses Demetriades & Co, LLC

86 Dubai............................................................. Abdulla Mohammed Al Awar

Fact File supplied by Dubai International Finance Centre

90 Gibraltar................................................................................ Adrian Pilcher

Fact File supplied by Isolas

93 Guernsey.......................................................................... Paul Christopher

Fact File supplied by Ozannes

97 Hong Kong.................................................................... Michael Olesnicky

Fact File supplied by Baker & McKenzie 100 Ireland............................................................................... Cormac Brennan

Fact File supplied by McCann FitzGerald Solicitors

104 Isle of Man............................................................................... Nick Verardi

Fact File supplied by Appleby

108 Jersey......................................................................................... Ian Rumens

Fact File supplied by Jersey Finance

112 Labuan......................................................................................... Eesim Teo

Fact File supplied by Labuan International Business & Finance Centre

115 Liechtenstein............................... Dr Markus Wanger & Dr Vivien Gertsch

Fact File supplied by Wanger Law & Trust

118 Luxembourg................................................................... Francis Hoogewerf

Fact File supplied by Hoogewerf & Cie

121 Madeira

Manuel João Pita

Fact File supplied by MLGT Madeira – Management & Investment

124 Malta....................................................... Donald Vella & Louis de Gabriele

Fact File supplied by Camilleri Preziosi

128 Marshall Islands.................................................................... Michael Wyler

Fact File supplied by International Registries, Inc (IRI)

131 Mauritius......................................................................... Ludovic C Verbist

Fact File supplied by AAMIL, Ltd

135 Netherlands................................................................................... Leo Neve

Fact File supplied by Neve Tax Consultants

139 Nevis........................................................................................ Derek Lloyd

Fact File supplied by Nevis Financial Services

143 Seychelles............................................................................. Simon Mitchell 146 Seychelles...................................................................................Steve Fanny

Fact File supplied by Seychelles International Business Authority

148 Singapore........................................................................... Angela Nicolson

Fact File supplied by Asiaciti Trust

151 St Vincent & the Grenadines................................... Sharda Sinanan-Bollers

Fact File supplied by Invest SVG

154 Switzerland....................................................................... Walter Streseman

Fact File supplied by Vistra SA

Contents

83 Cyprus............................................................................. Christos Mavrellis

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IFC Review • 2010

Editor’s Note

W

ELCOME TO IFC REVIEW 2010 – your defi nitive guide

to global wealth management and international fi nancial centres.

It will be interesting in the years to come to see how history records the role of international fi nance centres (IFCs) in the current global recession.

Contemporary commentators seem divided as to the importance or otherwise of off shore jurisdictions in the fi nancial industry’s world-wide downturn. Th ere is an argument that suggests if so-called ‘onshore’ jurisdictions were as well regulated and supervised as those off shore, then the events of the last two to three years would most likely not have occurred.

Regardless of who is to blame, there can be no doubt that as the fourth edition of IFC Review goes to print, it is in the knowledge that the fi nancial world has been rocked to its very core.

Most dramatically, we have witnessed the fall of what were considered to have been infallible institutions – national banks and fi nancial institutions which have proven to be more than fallible.

And yet the more tangible after-eff ect of the crisis has been the increased focus on transparency and information exchange in tax matters, driven by the Organisation for Economic Cooperation and Development (OECD) and other international organisations. Off shore jurisdictions would argue that they have been unfairly targeted in this push for increased scrutiny and regulation, yet it seems to be making its mark – OECD fi gures show that over 300 TIEAs had been signed by January 2010.

Inevitably, the credit crisis and the signs or otherwise of ‘green shoots’ in the industry form the basis of much of the commentary in IFC Review 2010.

Within these pages, experts we have

gathered from around the globe, onshore and off , analyse the current international fi nancial situation and consider the causes and possible options for dragging the industry from this malaise.

Richard Hay, in his article, ‘International Financial Centres: Good for the Global Economy?’ on page 9, considers the perception governments have of offshore centres and the use of these centres as scapegoats by suprainternational bodies, concluding: “Small IFCs are convenient targets… as ‘low tax’ and ‘low regulation’ are easily confused and conflated. The ‘tax haven’ tag conveniently implies both, despite its literal confinement to the former.”

From the other side of the regulation fence, Jeff rey Owens, Director of the OECD’s Centre for Tax Policy Administration, measures progress among IFCs in the quest for tax transparency and states the case for continued regulation as new market economies emerge (on page 13).

Meanwhile, in his article ‘Asian Regulation in the Year of the Tiger: PussyCat or Man-Eater?’ on page 32, Alan Ewins, Head of Allen & Overy’s Asian Financial Services Group, considers how various jurisdictions within Asia have fared in the credit crunch and diagnoses a struggle “between the creation of internationally coherent markets and, in some places more than others, the protection of the home patch.”

Still in Asia, Mary Ellen Hutton and Philip Munro of Withers, delineate (on page 35) why they believe trust planning will become an increasingly important tool for wealth protection as Asian jurisdictions continue their ascent up the ranks of international fi nance centres. Solicitor, Nigel GoodeveDocker, on the other hand, highlights

the challenges facing the off shore trust (on page 37). In a wide-ranging but acutely observed account, he discusses how over-promotion and manipulation of the private trust as a commercial tool has been a key contributing factor in the increased pressure now being applied on off shore centres by western governments.

Regulator Marcus Killick, in his article, ‘A Regulator of Repute’ on page 11, proff ers advice on how off shore jurisdictions might armour-plate themselves against future crises, whilst Peter O’Dwyer bemoans the lack of knowledge and experience among those groups entrusted with the passage of the Alternative Investment Fund Managers’ Directive (on page 45).

Regular contributor, Prof Denis Kleinfeld, examines asset protection in an increasingly litigious America on page 23 and, on page 30, Clive Cutbill examines the impact that an increasingly regulated fi nancial industry is having on international philanthropy – with some surprising fi ndings.

I am certain that history will show that off shore business will be a necessary, and probably a vital element in the post-credit crunch clean-up operation.

Some jurisdictions may not survive the downturn, but while there are high taxing countries there will always be lowtax alternatives dotted around the globe.

With information collated on more than 25 jurisdictions off ering key services to international tax planners and private wealth managers, in addition to professional insight and analysis of the principles underlying the industry, IFC Review 2010 proves once again that it is the defi nitive guide to global wealth management and international fi nancial centres.

Ciara Fitzpatrick Editor

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IFC Review • 2010

International Financial Centres: Good for the Global Economy?

by Richard Hay, Principal, Stikeman Elliott LLP, London, UK

T

HE GLOBAL FINANCIAL CRISIS

has prompted re-examination of the conservative policy consensus which favoured deregulation and globalisation as the twin engines of growth over the last 30 years. Naked capitalism has become unfashionable; interventionist policies are the new mantra.

Domestic politicians and regulators and their supranational agencies such as the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD) are riding a tsunami of public opinion seeking change. New architecture for financial markets is at the top of the G20 agenda. More, but not necessarily better, regulation is the likely outcome.

The world’s small finance centres have been singled out (along with hedge funds) for special attention. Low regulatory standards in so-called ‘tax havens’ are perceived to have contributed to

the global financial chaos. Despite the prevalence of this perception amongst politicians and the general public, the consensus view of technically informed observers (such as the IMF) is that the best of such centres (including, for example, Singapore, Hong Kong and many of the British Crown Dependencies and Overseas Territories) are already generally better regulated than their big country counterparts. If this is true, why are ‘tax havens’ so consistently maligned in the mainstream media?

Lazy stereotypes on international financial centres (IFCs) persist. Such stereotypes do not reflect the now pervasive culture in the world’s leading financial centres for rejection of tax evading clients (who bring trouble in their wake).

Professional probity and high standards of rigorously enforced regulation are also the norm in the leading IFCs following ten years of hegemony for ‘global’ regulatory standards proposed by supranational agencies including the Financial Action Task Force, the OECD and the IMF. In a curious turn, such standards have generally been more consistently adopted and enforced in the smaller finance centres, while commercial and finance communities in the larger countries have occasionally benefitted from the regulatory arbitrage which flows from fending off

implementation of expensive and onerous rules promoted by the agencies they fund and control.

In the current crisis, big country politicians and regulators could be forgiven for seeking scapegoats to deflect criticisms which may otherwise land closer to home. IFCs are rarely represented in the supranational clubs forging the new architecture and it is generally easier, and certainly more polite, to blame the absent. Small IFCs are convenient targets in these fora, as ‘low tax’ and ‘low regulation’ are easily confused and conflated. The ‘tax haven’ tag conveniently implies both, despite its literal confinement to the former.

Do low standards and low tax attract consumers as the media and politicians suggest? Consider the solicitations that regularly clogged email inboxes before the advent of spam filters. The invitations proposed financial transactions with outstanding returns and complete discretion. Regulation and tax levies (or data tracking to support such enforcement) were plainly not contemplated. Despite these blandishments, those solicitations were rejected by most recipients. Why? Consumers do not patronise poorly regulated centres. Centres with low standards are commercial failures, even in the absence of regulatory intervention.

International Financial Centres

10

IFC Review • 2010

Although the current malaise has given impetus to the challenge to IFCs, the pressures on them are not new, of course. Is there a more fundamental agenda which underpins the current thrust against such centres?

The leading IFCs have played a key role as lubricants in globalisation. That many such centres are clustered near major financial markets such as the City of London and New York is no coincidence. Their tax neutral platforms have made them essential symbiots supporting the depth and success of such ‘onshore’ markets over the last thirty years.

IFCs do the following: • provide liquidity to markets, lowering the cost of capital for business; • allow companies to manage sudden risks, like foreign exchange fluctuations; • facilitate the movement of capital from inefficient businesses to ones that can use it more productively; • pool funds to act as portals for efficient collective investment into and out of metropolitan countries.

Globalisation is regarded with suspicion by many domestic politicians as it

introduces competition, including on taxes. Despite formally welcoming such competition, most producers (including governments) prefer monopolies, or at least manageable cartels. So any tax competition fostered by IFCs is often considered unwelcome, even while (or perhaps because) it prompts greater efficiencies in utilisation of onshore government finances.

The most important point in the challenge to small financial centres may be the desire to flex control over mobile capital.

In a globalising world, is there any more important sovereign prerogative than controlling where mobile money alights?

If centres like Jersey, Cayman or Bermuda are rejected by their longstanding natural allies, they could redirect substantial sums elsewhere in the process. Funds already in the United Kingdom (UK) or the United States (US) are more likely to be deployed domestically where they remain less disconcertingly beyond the control of the large governments.

Finally, despite recent turmoil, financial services jobs are highly lucrative.

US government statistics appearing in

the CIA fact book show that the top 20 economies in the world (measured

by GDP per capita) are dominated by countries with either oil or financial services. Big countries want to control financial services business for sound commercial reasons. It would be unseemly to overtly demand surrender of such high paying jobs from competitors, but calls for heavy regulation on smaller market participants facilitates that same goal.

Is it in the interests of Western countries such as the UK and the US to pursue this agenda of maligning the small finance centres which surround them? The reputation of the UK’s offshore centres for probity, professional skills and financial sophistication enables them to attract capital from around the world.

Such capital is then substantially directed into the UK, European and US capital, banking and securities markets. Capital goes where it is welcome, of course, so the erection of US or European Union barriers to trade with international financial centres could steer their allegiances towards Asian, Middle Eastern or Latin American markets. Who will suffer most if UK or US relations with their financial centre territories are damaged?

11

IFC Review • 2010

A Regulator of Repute

by Marcus Killick, Chief Executive Officer, Gibraltar Financial Services Commission, Gibraltar

A

S I WRITE THIS ARTICLE, it is

difficult to think of football as the ‘beautiful game’. This week has seen arrests throughout Europe in relation to the biggest match-fixing case in history, and the Irish failing to have their crucial World Cup qualifying match with France replayed because of a handball by French striker, Thierry Henry, in the build-up to the winning goal. This was despite Henry saying that a replay would “be the fairest solution”.

Yet football will survive, the fans will still buy the shirts and pay to watch their teams. Its reputation will be tarnished, some people may go to jail, teams will be penalised, but the game will go on. Its reputation will recover.

Football is a blend of self-regulation and regulation from without. Much of what goes on during a game is reliant upon the sportsmanship of the players.

Yet as the rewards for playing have become greater, so the players’ notion of

Regulation

12

IFC Review • 2010

‘fair play’ seems to have deteriorated. We are now faced with the possibility of video replays to help the referee, together with new rules and greater penalties for the culprits. It would be difficult to conceive of a major game without the ‘men in black’ to keep order. Is the game better as a result? I doubt it. Yet it will still be watched by countless millions every week and sponsorship money will still flood in to the big clubs.

Once upon a time the financial world was driven by self-regulation and selfdiscipline. Stock Exchanges were run in accordance with their members’ requirements and rules (such as the expulsion of those who failed to honour a deal) were designed in the interests of those members. Yet, as with football, the era of operating any type of financial institution without outside interference and direction is drawing to a close. Even the last bastions, such as the hedge funds, are now succumbing to the inevitable.

So what about the so-called ‘offshore’ centres? Is there still a place for them in the world of the Organisation for Economic Cooperation and Development and its ‘white lists’, the world of the G20 and of ever increasing obligations to cooperate?

Despite the smaller financial centres not being responsible for the global crisis (indeed, some are victims of it), significant focus is being placed upon them.

Within the British Overseas Territories there was the recent Foot Review.

Elsewhere, the Financial Action Task Force are assessing which jurisdictions should be the first to face the latest review of compliance with international standards in the fight against money laundering and the financing of terrorism. These reviews are being backed by real action against those who fall short of what is expected. Furthermore, huge budget deficits in major countries have led to the introduction of ever more draconian measures to recover money they believe has been hidden outside their jurisdiction to evade taxation.

So what is the biggest key to survival for the smaller centres? In my view, survival will predominately hang upon reputation and, in particular, the reputation of a jurisdiction’s regulator. However, the issue of reputation is not simply one for the regulator, it affects the government and industry equally.

Turning first to the regulator. The reputation of financial service regulators has hardly been enhanced over the last two and a half years. Pilloried for having failed to see the impending crisis, for

having been slow to react and then swift to over-react to it, supervisors, like many of the institutions they watch over, have been characterised as dangerously complacent. Work has commenced to repair this tarnished image. It will take time but quantifiable steps are now being taken.

However, there is an additional wrinkle; some regulators also have a statutory duty to ‘protect the reputation’ of their jurisdiction. It is a good phrase, but what, in reality, does it mean? Are we like some latter-day prince, mounted on a white stallion, there to protect the honour and virtue of the virginal jurisdictions we have been entrusted to guard?

Or are we closer to some political spindoctor looking to place a positive gloss on whatever unsavoury activity may be going on. In this article I will set out what I believe a regulator’s role in protecting the reputation of a jurisdiction should be. Unsurprisingly, it is neither of the two roles mentioned above.

Let me start with the easy bit.

Regulators should keep those who are not fit and proper out of the industry.

Not just crooks but also the seriously incompetent. This must not be done in an arbitrary way, denying people on the basis of rumour, gossip or innuendo. The reputation of a jurisdiction can be equally damaged if the regulator is not perceived as fair. Regulation, like licensing, is by its very nature a matter of risk assessment, risk management and risk mitigation. If regulators did not accept that some risks were inevitable, there would be no finance industry. They do accept it, because they know there is a trade-off between risk and reward. Though risk cannot be eliminated, a license should not be granted where it cannot be managed or mitigated. Yet it is not the place for a regulator to focus on what an applicant brings to a jurisdiction in terms of employment or tax revenue.

In respect of the applicant itself, there are a number of key issues which have to be addressed, including whether or not the regulator can effectively supervise its activities. Regulators have sometimes been unable to gain the necessary skill sets to understand the business they supervise. This lack of understanding has, on occasion, proved fatal and cannot continue going forward. There is bound to be an increased cost as the resources and skill sets of many regulators are made fit for purpose as the industries they supervise grow increasingly more sophisticated and complex.

More and more, applicants will need

their own premises and staff – the days of ‘brass plate’ applicants are clearly numbered. Core activities of the firm will need to be undertaken in the jurisdiction rather than being outsourced. This need for real activities, as well as mind and management being located in the centre, is given added impetus by the knowledge that tax authorities in some jurisdictions have tried to challenge the tax status of firms that do not, in their view, have sufficient presence in the offshore centre.

One lesson the crisis has taught all regulators is that bigger is not always better.

I have little doubt that both Northern Rock and Lehman Brothers would have been welcomed in virtually any jurisdiction a couple of years ago. Today, regulators in smaller centres can gain a reputational advantage by being more approachable than their larger colleagues, enabling them to adopt a case-by-case approach. This flexibility, particularly when aligned with a swiftness of response and no subsequent loss of regulatory or supervisory standards, makes such regulators much more attractive. The smaller centres are ideal for attracting small niche players, including new players in insurance and banking. These players are often far easier to supervise than their larger, more complex and older peers.

Next is the issue of the reputation of the jurisdiction. I personally believe this should encompass notions of fairness, consistency and impartiality. The reputation of government is particularly important. Smaller centres have benefited from their ability to respond rapidly to changing market conditions and new opportunities. They can be more innovative in their corporate structures (Protected Cell Companies being but one example). Legislation facilitating changes can be passed more rapidly because of the lower level of bureaucracy.

Finally, let’s consider the industry itself. Ultimately, industry is the main beneficiary of a good jurisdictional reputation, but everybody involved – from captains of industry to industry foot-soldiers – must also be industry’s guardians. Neither regulators nor governments can vet every client or analyse every business risk. Industry alone can act as gatekeeper by undertaking good due-diligence, not simply in the fight against money laundering but also in ensuring that the jurisdiction attracts quality business. Some centres historically relied upon quantity. This may have served them well in the past; it will not do so in the future.

13

IFC Review • 2010

Taking Forward the G20 Tax Transparency Agenda

by Jeffrey Owens, Director of the OECD’s Centre for Tax Policy Administration

A

T THE LONDON SUMMIT IN APRIL 2009 the G20 announced

the end of bank secrecy. While it may have been a little early to announce victory, there has been an unprecedented movement towards removing bank secrecy as a barrier to the exchange of information in tax matters: • since April, over 100 tax information exchange agreements (TIEAs) have been signed and over 70 tax treaties negotiated or renegotiated to incorporate the standards; • all major onshore and offshore centres have now endorsed the standards and those which had impediments to implementing them are in the process of removing them; • 15 jurisdictions – Aruba, Austria, Belgium, Bermuda, British Virgin Islands, Bahrain, Cayman Islands, Gibraltar, Liechtenstein, Luxembourg, Monaco, Netherlands Antilles, San Marino, Sin-

gapore and Switzerland – have moved to the category of jurisdictions having substantially implemented the standard since 2 April; • Austria, Andorra, The Bahamas, Chile, Liechtenstein, San Marino, Singapore, and Macao, China have passed legislation aimed at implementing their commitments to the international tax standard; • Malaysia, the Philippines, and Hong Kong, China have initiated important legislative changes intended to allow them to meet the international standard.

Box 1 (overleaf, right) sets out the current state of play.

Over 170 representatives from 70 jurisdictions and international organisations met on 1-2 September 2009 in Mexico and agreed on a new structure and mandate for the Global Forum: • almost 90 jurisdictions agreed to participate in the new Forum; • a steering group was created consisting of Australia, Bermuda, Brazil, Cayman Islands, China, Germany, France, India, Japan, Jersey, Singapore, South Africa, Switzerland, United Kingdom and the United States; • an initial three year mandate was established and an in-depth peer review and monitoring process was put in place un-

der a Peer Review Group, which has already held two meetings where it agreed its terms of reference and a schedule for the upcoming peer reviews.

But the work is far from finished. 11 jurisdictions that were classified as tax havens in 2000 have one or zero international agreements which implemented the exchange of information standard (Belize, Liberia, Montserrat, Nauru, Panama, St. Lucia, Vanuatu have zero agreements to the standards). Some jurisdictions are negotiating TIEAs with parties with whom they have little or no economic ties. These issues will be addressed in the context of the Global Forum’s peer review and monitoring process.

Over the next six months the focus of this work will be on: • strengthening the Global Forum membership, creating a Global Forum Secretariat and a more transparent governance and financing structure; • implementing an in-depth Peer Review; • implementing a multilateral TIEA which has been designed by the Organisation for Economic Cooperation and Development (OECD) and extending the membership of the joint OECD/Council of Europe multilateral convention for adminis-

Tax Transparency Agenda

14

IFC Review • 2010

trative assistance in Tax Matters; and • continued work on the three categories of countermeasures: domestic tax measures; tax treaty measures; non-tax measures. Many countries or groups of countries are already using such countermeasures.

As this initiative proceeds, particular attention will be paid to engaging with developing countries since effective taxation systems: • reinforce democratic governance through increasing the accountability between the state and its citizens – a role that is at the core of effective state-building; • enable the pursuit of pro-growth economic policies; • provide certainty and transparency to business thereby encouraging investment; and • reduce long term reliance on aid.

The economic crisis has put significant pressure on aid budgets and reduced revenues in developing countries at a time when expenditure on social programmes and economic stimulus is most acute. It is vital that developing countries protect their revenue flows by countering offshore non-compliance and strengthening their administrative capacity.

Developing countries face a number of interconnected challenges in mobilising their domestic tax resources: the process of liberalising trade has reduced revenues from tariffs (tariffs typically account for 40 per cent plus of tax revenues in Africa); illicit flows, including tax evasion, to tax havens and other non-cooperative jurisdictions are undermining the revenue base; weak tax administrations fail to collect the revenues due.

The OECD’s Development Assistance Committee and Committee on Fiscal Affairs is exploring how OECD countries and the donor community can support and reinforce the work of the Global Forum on Transparency and Exchange of Information by assisting developing countries: • to participate as equal members; • to enter into agreements, working through multilateral mechanisms where possible; • to create administrative structures to implement exchange of information mechanisms both for the provision and receipt of information; and • to strengthen capacity including audit mechanisms to enable developing countries to request and use information obtained under agreements.

A PROGRESS REPORT ON THE JURISDICTIONS SURVEYED BY THE OECD GLOBAL FORUM IN IMPLEMENTING THE INTERNATIONALLY AGREED TAX STANDARD1

Progress made as at 30th November 2009 (Original Progress Report 2nd April) Jurisdictions that have substantially implemented the internationally agreed tax standard Argentina Estonia Korea San Marino Aruba Finland Liechtenstein Seychelles Australia France Luxembourg Singapore Austria Germany Malta Slovak Republic Bahrain Gibraltar Mauritius Slovenia Barbados Greece Mexico South Africa Belgium Guernsey Monaco Spain Bermuda Hungary Netherlands Sweden British Virgin Iceland Netherlands Switzerland Islands India Antilles Turkey Canada Ireland New Zealand United Arab Cayman Islands2 Isle of Man Norway Emirates China3 Israel Poland United Kingdom Cyprus Italy Portugal United States Czech Republic Japan Russian US Virgin Islands Denmark Jersey Federation Jurisdictions that have committed to the internationally agreed tax standard, but have not yet substantially implemented.

Jurisdiction

Year of Commitment

Andorra Anguilla Antigua and Barbuda Bahamas Belize Cook Islands Dominica Grenada Liberia Marshall Islands Montserrat

2009 2002 2002

Brunei Chile Costa Rica Guatemala

2009 2009 2009 2009

2002 2002 2002 2002 2002 2007 2007 2002

Number of Agreements

Jurisdiction

Tax Havens4 (8) Nauru (4) Niue (10) Panama St Kitts (5) and Nevis (0) St Lucia (3) St Vincent and (1) the Grenadines (1) Samoa (0) Turks and (1) Caicos Islands (0) Vanuatu Other Financial Centres (7) Malaysia (0) Philippines (1) Uruguay (0)

Year of Commitment

Number of Agreements

2003 2002 2002 2002

(0) (0) (0) (6)

2002 2002

(0) (5)

2002 2002

(3) (5)

2003

(0)

2009 2009 2009

(3) (0) (2)

Jurisdictions that have not committed to the internationally agreed tax standard Jurisdiction

Number of Agreements

Jurisdiction

Number of Agreements

All jurisdictions surveyed by the Global Forum have now committed to the internationally agreed tax standard 1. The internationally agreed tax standard, which was developed by the OECD in co-operation with nonOECD countries and which was endorsed by G20 Finance Ministers at their Berlin Meeting in 2004 and by the UN Committee of Experts on International Cooperation in Tax Matters at its October 2008 Meeting, requires exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes. It also provides for extensive safeguards to protect the confidentiality of the information exchanged.

2. The Cayman Islands have enacted legislation that allows them to exchange information unilaterally and have identified 12 countries with which they are prepared to do so. This approach is being reviewed by the OECD. 3. Excluding the Special Administrative Regions, which have committed to implement the internationally agreed tax standard.

4. These jurisdictions were identified in 2000 as meeting the tax haven criteria as described in the 1998 OECD report.

The views expressed in this article are those of the author and do not necessarily reflect those of the OECD or its Member countries.

15

IFC Review • 2010

OFCs and Clients of the Future

by L Burke Files, Tarsus Trust Company Ltd, Nevis

F

OR THE SAKE OF OUR DISCUSSION, an offshore financial

centre (OFC) is a jurisdiction that seeks to create a competitive advantage through law. Despite the best efforts of the United States (US) and the Organisation for Economic Cooperation and Development (OECD), OFCs are thriving and their numbers are growing.

This is no mere hyperbole – OFCs are being developed in Bangladesh, Tunis Financial Harbour, Azerbaijan, Republic of Montenegro, Jamaica and Ghana, to name just a few – other, more highprofile financial centres are continuing to evolve and become more independent from former empires and from the US and OECD overseers.

These OFCs are doing this through individual innovation, imitation of other successful OFCs and development of regional OFC advantages. The emerging and existing OFCs are cultivating their regional and jurisdictional advantages in addition to their advantages in law.

OFCs are not only growing in number, the dominant, prominent players are becoming more diverse and competitive, too. This blossoming of OFCs is not a fluke or a counter-trend – it is the trend.

Entrepreneurs worldwide are leveraging information technologies to employ comparative jurisdictional advantages and concentrate wealth. They, as with all entrepreneurs, seek protection from taxes and litigation and operational efficiencies not found in their domestic

financial centres. Entrepreneurs on the internet and in developing nations are the primary source of new clients and expanding demand for OFCs. What does this mean for OFCs and for service providers in OFCs? In short, it means that they are going to be facing competitive pressures in several areas – some that we can foresee. As the competition for clients between OFCs escalates, this competition will promote even more innovation in their products and legal environments. The innovations and changes this competition will spark will influence the entire world of finance. For example, in the last several years common law OFCs have passed laws allowing for the formation of foundations aimed specifically at clients from civil law countries. While panned by many, these foundations have been reasonably successful at drawing civil law clients to new common law jurisdictions where the transition structure and civil law foundation are recognised by the client’s country and allow the client access to advantages offered by common law.

Expect OFCs to become much more responsive to the formation of more complicated structures and entities that require some form of licensing. A six-month process to establish a captive insurance company, a trust or a hedge fund is non-responsive, and in the future will be the death knell for an OFC jurisdiction. Further, jurisdictions that do not respond to due diligence enquiries

OFCs and the Future

16

IFC Review • 2010

– questions such as, “is X fund licensed and in good standing?” – will also fall out from the field of competitive players.

Today, no one will invest in a fund unless they can get independent confirmation of its license status. The courts, as arbiters of these agreements and regulations, need to be accessible and authentic in the way they conduct themselves, open to all, and reasonably efficient in terms of time and cost. Currently, several OFCs exist in the shadow of an ossified or disreputable judiciary. Jurisdictions with dysfunctional courts encourage the inclusion of independent international arbitration clauses to avoid the judiciary whenever possible – and create opportunity for competing OFCs. The OFC of the future will be quick, modern in all aspects of communication and law, and will promote closer relationships between the regulators, professionals and service providers.

OFC service providers are going to have to evolve or cease operations. No longer are single structures a ‘cheap and cheerful’ means of accessing the international financial community to achieve commercial and legal objectives. The current purveyors of one-stop solutions are offering neither ‘cheap nor cheerful’ solutions – they are simply failing to meet clients’ needs and expectations.

As professionals we need to learn the advantages of each location, each structure, and each agreement. We need to learn the specific and artistic abilities of all providers, as well as an ability to blend and arrange those services to achieve our clients’ end objectives.

The first step in this evolution is occurring in the form of location-specific formation specialists for structures.

Many formation firms have dropped multinational financial planning and only specialise on the advantages of their jurisdiction. These firms will shrink to one or two knowledgeable practitioners with a clerking staff, and will be beset by intense pricing competition to lower the cost of formations. International financial planners are freeing themselves from single jurisdiction providers and tutoring themselves on the advantages of various jurisdictions. The planners also tend to have many affiliates, with subject matter experts working on such things as contracts, options, intellectual property, web commerce, geographic advantages, trusts, escrow, payment management, insurance, estate planning and forecasting. These firms are evolving into loose or virtual affiliations of professionals rep-

resenting multiple jurisdictions and experiences. The client’s faith in a resident expert, operating in one location, capable of assisting and servicing all of their needs, is dying – and very near death.

Clientele for OFCs has changed.

Generally, the last 30 years has been dominated by the model of a financial expert, generally working with a family that had a presence in one or two countries. The patriarch of the family typically sought tax minimisation, control of their heirs, and multi-generational wealth management. It was straightforward work even though the solutions appeared elegant. What we frequently see today is a professional entrepreneur with operations in many locations, who may have more than one passport and may spend most of their time in foreign countries sourcing opportunities.

When they find opportunity, they rely heavily on the expertise of their international professional team to locate the right domicile, for the right purpose, for right now. That’s right – for right now. If another country offers a better tax environment, better incentives, less litigation or more certainty in the rule of law, they will move their enterprise lock, stock and barrel (domain, structure and e-commerce solution) to the better jurisdiction. This used to be difficult as you needed to set up manufacturing and obtain labour permits and work permits for the expatriates. Not any more. Most functions are outsourced to supporting companies to allow maximum flexibility for the entrepreneur. It’s easier to move from country to country in this age of the Intangible Economy* than it has been at any other time. The client of the future values freedom of movement and embraces choice.

What these changes mean for both the OFC and the international experts is that they need to be able to speak more languages, be sensitive to more customs and know that the non-resident, nondomiciled, expatriate, nation-wandering entrepreneur is the client of the future.

You must be able to respond to their needs. This requires the ability to construct solutions that can be presented as a seamless integration of law and purpose, with supporting technology, services and ideas – wherever they exist in the world. Established nations will react to this by making it harder to move once you are established as a resident or enterprise. The best advice might be to counsel would-be entrepreneurs to start operations in a financial centre free of

such restrictive covenants.

These changes speak volumes to KYC rules and how – for the most part – they needlessly impede business. The KYC function is about knowing your client, really knowing your client, so that you know the origin of funds, the desires of the clients (both today and tomorrow) and can assist in fulfilling those needs.

KYC is about due diligence during the client intake process and ongoing refreshment of that knowledge in every year of your relationship. Trust between you and your client, however tenuous, is gained through an open and transparent process of requests for, and delivery of, professional solutions. Where these rules are failing today is in the fractionalisation of the process and the abject lack of follow-up.

During the intake process, the bank has one set of due diligence, the service provider another, the trust officer a third and the underwriter a fourth. It is a ridiculous circus of forms, meaningless disclosures and duplication of effort.

Dawdling clerks do their best but fail to respond in either an intelligent or timely fashion. The professional working in a group needs one person designated to gather required information, that can be shared as needs demand. Five or more original copies of a bank reference letter should not be necessary – one should do.

The OFC that understands how the results of a due diligence investigation can be freely and openly shared, and can respond to that knowledge, will have seized an opportunity and will enjoy a jurisdictional advantage. Banks, trust companies, underwriters and escrow agents, as a service providing community, should not each need to hire an investigative expert. All parties need to agree in advance who is going to do the work and let the client know exactly what is going on – no back-office whispering – get it done and share the information with each of the responsible professionals.

Both the changes I am observing and the opportunities I’m suggesting are changes in procedures that can be loosely described as ‘critical information’.

‘Intellectual property’ and ‘critical information’ (collectively, IPCI) are terms that will enter all of our lexicons, as IPCI is the currency of the future. IPCI is at the very heart of the modern corporation’s vitality. In the modern world, information is the currency that gives a business value. Understanding this is the key to understanding the flexibility of emerging business models, and how their needs are changing.

17

IFC Review • 2010

to plan and act effectively against your best interests. It is information about your company that your competitors could use to make you non-competitive or hammer you into bankruptcy. The identification of your company’s critical information should be construed in the broadest of terms and include items such as customers lists, employee handbooks, formulas, shipping and receiving records, travel of key personnel and presentations made at conferences.

Researching several studies on business acquisitions and mergers shows that on average 75 per cent of the purchase price of a company represents intangible assets and goodwill. Analysing mergers shows a further breakdown of the intangibles to be approximately 25 per cent ‘proprietary technology’ and 50 per cent goodwill. These numbers demonstrate that buyers and sellers clearly assign significant value to intangible assets. This awareness explains why there is global attention by management to protect their IPCI. The emergence of IPCI as a key form of corporate assets begs a redesign of the modern corporation’s financial structure to account for, recognise and deploy IPCI. Corporate vitality will lay within the organisational change that contributes most significantly to the

development of a robust IPCI Asset Elements Registry – the balance sheet, if you will, for intangible assets.

“I hate what private banking has become, from Wall Street to High Street to the Bahnhofstrasse. You can’t get them on the phone; everyone has their nose in the air, read only the WSJ and FT and never get out. Not one of them understands what it means to be an entrepreneur or the mechanisms of a web-based business. It’s no longer porn and pills – it’s software, merchandise and customer services.”

Not a resounding endorsement from a long-time international entrepreneur. Wealth, today and tomorrow, is coming from the entrepreneur on the internet and the entrepreneur in developing nations. We must prepare to serve them. * This is the era of the Intangible Economy - This is the Intangible Age. • The Industrial Age – began in Britain in the 18th and 19th Centuries • The Information Age – roughly from the 1980’s to 1992 • The Knowledge Economy – started in 1992 and continued to 2002 • The Intangible Economy – started in 2002.

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OFCs and the Future

Intellectual property is any intangible asset that consists of knowledge or know-how. A tangible asset is physical – it has form, it has a creation date and its location can be described. Tangible assets are created from intangible assets.

While this description is as accurate as a brief description can be, it could also be describing critical information. So, to be more specific, let’s refine our definitions.

‘Intellectual property’ is a concept that includes copyrights, trademarks, service marks, patents, trade secrets and other related rights. Intellectual property is an abstraction recognised by the law. The holder of these abstract ‘properties’ has certain exclusive rights to their creation (work, symbol or invention) that is covered by law. These rights are specific to the jurisdiction in which they are registered or are covered by international treaties that accept registration in third country jurisdictions. If a legal authority somewhere does not recognise the intellectual property, the holder has no rights. Thus, if your intellectual property finds its way to jurisdictions where it is not protected, this will pose a problem.

‘Critical information’ is specific information about your intentions, capabilities and activities which in the hands of your adversaries would allow them

18

IFC Review • 2010

Liechtenstein Disclosure Facility

by John Carrell, International Private Wealth Group, Farrer & Co, London, UK

M

UCH HAS BEEN WRITTEN ABOUT the Liechtenstein

Disclosure Facility (LDF) but some of it has been surprisingly wide of the mark. As the United Kingdom (UK) tax expert on the Liechtenstein Government team which negotiated its terms with Her Majesty’s Revenue and Customs (HMRC), I would like to explain how it actually works – and in doing so puncture some myths. I will start by recapping the main features of the Memorandum of Understanding (MOU) of 9 August 2009 which contains the LDF. The MOU: What Liechtenstein Has to Do

The Government of Liechtenstein will enact legislation (expected early in 2010) requiring their banks and trust companies to write to their UK account holders and investors, giving them a choice to either: 1) Show that they are UK tax compliant; or 2) Take up the LDF. If they do neither, the Liechtenstein bank/intermediary will have to cease acting for them. In the case of bank accounts, these will have to be closed and the funds transferred to another jurisdic-

tion. I shall refer to this letter in this article as the ‘ultimatum’.

What is still not widely appreciated is that the ultimatum does not only apply to Liechtenstein bank accounts but also to Liechtenstein legal entities such as: • stiftungs (foundations); • anstalts (establishments); • trusts (including the Liechtenstein trust reg).

The number of UK individuals who have bank accounts with Liechtenstein banks is probably nowhere near the ‘5,000’ that is always quoted in the press. But a very large number will have bank accounts in Switzerland, say, which are held through Liechtenstein foundations – usually for succession reasons. They too will be receiving the ultimatum. If they do not satisfy the Liechtenstein intermediary that they are UK tax compliant or are taking up the LDF, they will have to cease to act.

For example, if they are a member of the board of the foundation, they will have to resign – and the foundation may have to be closed down or migrated from Liechtenstein in consequence.

The LDF

HMRC on its side is providing a disclosure facility (the LDF) to those

19

IFC Review • 2010

The Notification Process

Once the legislation has been enacted, the Liechtenstein intermediary will need first to identify UK individuals who have bank accounts or legal entities. Within three months of making the identification, they have to send out the ultimatum letter. (There is no time limit in the MOU for making the identification, although one may be incorporated in the Liechtenstein legislation.) Board members of Liechtenstein foundations will often not have dealt directly with the

individuals or family behind the foundation – it may well be a Swiss bank or Swiss trust company that has had the relationship with the client. In drafting the MOU, we took this into account and tried to make it as simple as practicably possible for the Liechtenstein intermediary to identify: a) who the individuals and families were; and b) whether they lived in the UK. Schedule 2 (definition of ‘beneficial interest’) was deliberately kept short (barely more than a page), as was the definition of ‘relevant person’ in Schedule 1. It was accepted that some fish might slip through the net as a result of having these fairly simple tests but the priority was to have something workable and not too bureaucratic.

Those receiving the ultimatum have 18 months in which to reply. This is a generous time limit to allow families in particular to agree between themselves on a course of action. If they are tax compliant, the simplest way of showing this is to provide a letter from their (professionally qualified) UK tax advisers to the effect that the Liechtenstein account/entity has been properly dealt with in their tax returns.

If they are non-domiciled and claiming the remittance basis of taxation, the Liechtenstein bank account may not have been reported at all on their tax returns. This will have been entirely correct providing they made no remittances to the UK from that account.

If they are not tax compliant and they have taken up the LDF, they will have received a registration certificate from HMRC which they should provide to the Liechtenstein intermediary.

close all their undeclared accounts, not just the ones in Liechtenstein or those held through Liechtenstein entities!

I am often asked what would happen if Liechtenstein does not enact the necessary legislation. Does this mean that the LDF becomes void and of no effect? My answer is no. The MOU only sets out what will be HMRC’s practice; it is not a treaty between two countries which relies on both sides enacting the necessary legislation. HMRC may well suspend the LDF if the Liechtenstein parliament votes against the legislation, but those who have already come forward under the LDF are entitled to rely on its terms.

Anyone already under investigation

by HMRC cannot take up the LDF. The term ‘under investigation’ is limited to cases where there has been a suspicion of serious tax fraud and the person has been formally notified by HMRC that an investigation has commenced or where they have been arrested for a criminal tax offence.

Any person previously under investigation by HMRC and who did not disclose the Liechtenstein account or Liechtenstein entity at the time, can take up the facility but will not have their penalty capped at 10 per cent.

They can, however, benefit from the 10 year time limit.

Finally, anyone contacted by HMRC under the first Offshore Disclosure Facility (in 2007) or the NDO, and who did not make disclosure, can take up the LDF, but their penalty cap will be raised from 10 per cent to 20 per cent.

Coming Forward Under the LDF

They can do so by establishing the necessary links now. To do this they can either: 1) Open a Liechtenstein bank account and transfer some funds there; or 2) Set up a Liechtenstein foundation or other Liechtenstein legal entity to hold funds abroad.

This is all they have to do. It is a widespread myth that they must transfer all funds in undeclared offshore accounts to Liechtenstein if they are all to benefit from the LDF. Providing they establish the necessary links, as set out above, all undeclared funds – wherever they may be – will qualify for the LDF terms.

This is subject to one important ex-

Those with Liechtenstein bank accounts or legal entities do not have to wait until they receive the ultimatum next year – they can take up the LDF now.

There is a good reason for acting straightaway as to do so will minimise penalties. For example, someone who has not yet submitted their tax return for 2008/9 should now include the income from the undeclared account from that year and, by submitting the return by 31 January 2010, avoid the interest and the 10 per cent penalty. At the same time they would register for the LDF for the period prior to 6 April 2008 only – a maximum of nine years.

It goes without saying that anyone taking up the LDF has, of course, to dis-

How Can Someone with No Present Links to Liechtenstein Become Eligible for the LDF?

Liechtenstein Disclosure Facility

with bank accounts/legal entities in Liechtenstein which is more favourable than they could otherwise expect.

A taxpayer coming forward in the ordinary way to put his affairs in order would be liable for back-tax going back up to 20 years, as well as interest and a penalty. The penalty would be a substantial percentage of that back-tax.

Someone coming forward under the UK’s current general tax ‘amnesty’, (the New Disclosure Opportunity (NDO) which has just been extended to 4 January 2010), has their penalty capped at 10 per cent but HMRC can still go back as far as 20 years.

The LDF also has a 10 per cent penalty cap but HMRC can only go back ten years to April 1999. Moreover, there is a cast-iron guarantee that there will be no criminal proceedings. The LDF is also attractive because it contains what is called a ‘composite rate option’. This has not received much attention in the press to date. It is an option to pay tax at 40 per cent in respect of all liabilities in a given year. At first sight this may not seem particularly attractive but suppose that someone has been diverting profits from a UK trading company to his bank account in Switzerland. Not only would there be tax on the income in the account itself but also tax on both the company and the individual in respect of the diverted profits. Together these taxes could total appreciably more than 40 per cent of the additions to the account in that year. The composite rate option is something that I discussed at some length with HMRC on the basis of worked examples. In many cases it would not be interesting but in some it will produce a big tax saving.

The perceived generosity of the LDF has provoked controversy in the UK. HMRC has been accused of rewarding those fortunate enough to have their undeclared accounts in Liechtenstein!

IFC Review • 2008

of these companies, but in the hands of ception. An offshore account will not the Austrian NEWCo. Interest for the qualify if it was; loan granted by the foreign lender is a) held in his own name and fully tax deductible and not due to any b) opened through a UK branch of withholding taxes in Austria. 50 per cent the bank in question. of the acquisition price of the shares This is best illustrated by some in the Austrian Hotel GmbH can be examples. amortized over a period of 15 years by the Austrian NEWCo and reduces its tax Example 1 base. Losses resulting from the Bulgarian X, who until now had no links with Hotel company can be set off from the Liechtenstein, opened an account in his tax base of the Austrian NEWCo. own name with a Swiss bank in Geneva Profits of the Austrian Hotel GmbH through its London branch 18 years ago. and new and Austrian Hotel The the income gains on the GmbH account are only taxed on the level of Austrian were never declared for tax. Although X NEWCo where they are compensated may be eligible for the LDF benefits in by the losses of the Bulgarian Hotel relation to other undisclosed accounts company, the interest paid for the loan he may have, he will not be eligible for and the amortisation of 50 per cent of those benefits in relation to this account. the acquisition price of the shares of the Tax is payable for the full 18 years and Austrian Hotel GmbH. there will be no 10 per cent penalty cap.

Conclusion Example 2

The Austrian Group Taxation System is The facts are as in Example 1, but the another cornerstone of the already very account was opened in the name of X’s friendly tax system in Austria, offers farBVI company. The account will qualify ranging possibilities for cross-border tax for the LDF benefits. optimisation within a group and offers material support in cases of mergers and Example 3 acquisitions.

The facts arenas in Example 1, but the

IFC Review • 2010

account was opened by X going directly to the bank in Geneva. The account will qualify for the LDF benefits.

The reason for excluding the bank accounts in Example 1, is that HMRC could have found out about them through information disclosure notices that they have been serving in recent months on over 300 hundred banks with UK branches.

Another widespread myth is that being able to climb on the LDF bandwagon in the way I have described is a ‘loophole’ of which HMRC was unaware. This is not so. Throughout negotiations, the UK and HMRC were happy that new business should flow to Liechtenstein banks and intermediaries in order to take advantage of the favourable LDF terms. This was to compensate Liechtenstein for the loss of undeclared funds which might leave the Principality.

Dave Hartnett of HMRC was quoted recently (in the 19 November issue of Taxation) as saying: “We certainly went into it with our eyes open on that issue. What it was really about was trying to play fair by Liechtenstein.

They were going a million miles beyond the

OECD standard, they were losing customers, they wanted this as part of a design so that they might get some new customers.

Interestingly, they are being phenomenally selective about who they are taking on – you can’t just hop in from the Caymans and get them to take you on; we were already seeing that they are refusing to take some people.”

Conclusion: the Outcome for Liechtenstein

As Dave Hartnett has stated, the Principality of Liechtenstein has positioned itself well ahead of offshore financial centres which have just been executing tax information exchange agreements (TIEAs). And it has done so without betraying banking and professional secrecy (unlike a neighbouring jurisdiction). It is not providing any information on UK taxpayers’ accounts to HMRC and nor are its banks and professional intermediaries doing so.

On the day it signed the MOU it also signed a TIEA with the UK, but the TIEA protects those with undeclared money in Liechtenstein – at any rate until 2015, by which time they should have left the Principality. Diagram 3

47

Austria

Liechtenstein Disclosure Facility

20

21

IFC Review • 2010

Brussels IV – the Draft EU Succession Regulation

by Michael Parkinson, Partner, Russell Cooke LLP, London, UK

O

N 14 OCTOBER 2009, the long

awaited draft European Union (EU) Regulation on jurisdiction, applicable law, recognition and enforcement of decisions and authentic instruments in matters of succession and the creation of a European Certificate of Succession – better known as ‘Brussels IV’ – was finally published1.

The Background to Brussels IV

Succession law within the EU is extremely diverse; compare for example the common law principle of testamentary freedom which applies in England, Wales and Northern Ireland (subject to some statutory intervention to safeguard the position of dependants) and the forced heirship provisions which apply in France and other civil law jurisdictions. Brussels IV will not alter that position; the internal succession law of individual member states will be unaffected.

The key issue which Brussels IV addresses is the diversity within the EU of the rules of private international law (PIL) which apply to succession issues. The draft regulation also deals with various related issues (including jurisdiction, recognition and enforcement of decisions, authentic instruments and the creation

of a European Certificate of Succession) but the focus of this article is on applicable law.

The PIL rules which apply in the United Kingdom(UK), for example, operate on the principle of scission under which moveable and immovable assets are treated differently. In the UK, succession to immovable assets is governed by the law of the jurisdiction where the assets are situated and succession to moveable assets is governed by the law of the jurisdiction in which the deceased was domiciled on his death.

By contrast, German PIL rules do not distinguish between moveable and immovable assets (the principle of unity) and succession to all assets is governed by the law of the deceased’s nationality.

PIL rules in other jurisdictions use the concept of habitual residence as the relevant connecting factor.

Identifying the applicable law under the relevant PIL rules is not the end of the process.

Where the PIL rules of one jurisdiction refer to the ‘law’ of a second jurisdiction, this could simply mean the internal law of that jurisdiction. However, the PIL rules of many jurisdictions apply the doctrine of renvoi so that the reference to the law of the second jurisdiction means all of the law of that jurisdiction including its PIL rules.

If renvoi applies, the PIL rules of the second jurisdiction may refer the matter back to the law of the first jurisdiction, in which case the first jurisdiction may

accept the ‘remission’ and apply its internal law. Alternatively, the second jurisdiction may refer the matter on to the law of a third jurisdiction and the first jurisdiction, if it accepts this ‘transmission’ will apply the internal law of the third jurisdiction. This is the ‘single’ renvoi doctrine.

Alternatively, the first jurisdiction may apply the ‘double’ renvoi doctrine.

This requires the first jurisdiction to deal with the matter in exactly the same way as it would be decided by a court in the second jurisdiction. The outcome therefore turns on whether the second jurisdiction rejects the renvoi doctrine altogether or whether it applies single or double renvoi. If both the first and second jurisdictions apply double renvoi, the result could be an intextricable circle where the matter is referred back and forth between the two jurisdictions.

The approach to renvoi differs within the EU and in some jurisdictions the position is less than clear – in England and Wales, for example, the doctrine of double renvoi in the context of succession was introduced in a High Court decision2 without any apparent authority or reasoning and the issue has not since been considered by the higher courts.

The case for introducing a uniform set of PIL rules to govern succession matters throughout the EU is therefore clear; the present divergent rules give rise to uncertainty, complexity and expense for the increasing number of individuals with cross-border issues.

Brussels IV

22

IFC Review • 2010

The Proposed Applicable Law Rules

The proposed new PIL rules are set out in Chapter III of the draft Regulation and are very straightforward.

Article 16 provides for a new general rule under which the succession to the whole estate (i.e. with no distinction between moveable and immovable property) will be governed by the law of the state in which the deceased had his habitual residence at the time of his death. The term ‘habitual residence’ is not defined; this has been the subject of much criticism and a definition may emerge as Brussels IV progresses towards its final form.

This general rule is subject to Article 17 which gives a testator the option to elect for the law of his nationality to apply instead of the law of habitual residence.

Article 26 provides that a reference to the applicable law under Brussels IV excludes the PIL rules of the relevant jurisdiction and so abolishes the doctrine of renvoi.

Scope of the Applicable Law Rules

Article 19 provides that the applicable law determined by Brussels IV will govern all aspects of the succession, although it is important to note that this does not extend to the formal validity or creation of wills.

Inheritance contracts are specifically dealt with by Article 18, which provides that they will be governed by the same law which would have applied under Articles 16 or 17 if the person whose succession the contract relates to had died on the day on which the contract was completed.

The making of gifts is outside the scope of Brussels IV (but falls within the ambit of the Rome I Regulation on contractual obligations which came into effect on 17 December 2009). However, under Article 19(j) the applicable law under Brussels IV will govern “any obligation to restore or account for gifts and the taking of them into account when determining the shares of heirs”; this includes the ‘clawback’ regimes which operate in most forced heirship jurisdictions.

The Clawback Problem

Broadly speaking, clawback operates by bringing back into account certain lifetime gifts made by the deceased in calculating the portion of the estate which is not subject to forced heirship. If the disposable portion is exceeded by the relevant lifetime gifts and testamentary gifts, the forced heirs may be able to

reclaim the excess by limiting the testamentary gifts and/or clawing back the lifetime gifts.

Clawback regimes differ widely between different jurisdictions; gifts to heirs and to non-heirs may be treated differently, time limits vary and the claim may be to the gifted asset itself or it may be for a monetary amount based on the value of the asset (in some cases at the date of the gift, in others at the date of death).

The recognition and application of such clawback regimes in the UK would be a new development, although the concept is not entirely foreign; a form of clawback already exists under UK insolvency legislation and under the Inheritance (Provisions for Families and Dependants) Act 1975 and the equivalent Northern Irish legislation.

From the UK’s perspective, this issue is perhaps the most controversial aspect of Brussels IV. However, the main difficulty with the clawback provisions is not limited to the UK. As currently drafted, the applicable law for clawback will be the applicable law under Brussels IV at the date of the deceased’s death. It would therefore be impossible to determine which clawback regime, if any, applies to a particular lifetime gift until the death of the donor.

The clawback issue is therefore certain to be the subject of further negotiations.

An obvious solution would be to adopt the same approach as for inheritance contracts so that the applicable law for clawback purposes is determined and fixed as at the date of the gift.

Separate Jurisdictions Within the UK

The UK does of course comprise three separate territorial units each having its own rules of succession. The effect of Article 28.1 is that England & Wales, Scotland and Northern Ireland will be considered as separate states for identifying the applicable law under Brussels IV. However, whilst that deals with the position under the habitual residence rule, it does not deal with the position of a UK citizen who wishes to make an election to apply their national law under Article 17 – can they choose the law of any one of the three UK territorial units without any further connection?

A further issue is that under Article 28.2, Brussels IV will not apply as between England & Wales, Scotland and Northern Ireland. It would be absurd for

Brussels IV to apply as between the UK and the rest of the EU but not within the UK itself.

The Next Steps

Brussels IV has a long way to go. There are a variety of technical and other issues in addition to those identified above which will need to be addressed and the Regulation as a whole is subject to negotiation between member states, a process which has begun but which may take up to two years to complete.

The European Parliament will also be considering the draft and introducing its own amendments.

The Regulation will not become effective until a further year after the draft has been agreed and finalised between the Parliament and the Commission so it may be 2012 or 2013 before it begins to operate. However, as currently drafted, the transitional provisions in Article 50 will give effect to choices of law made in accordance with Brussels IV before it comes into effect.

It also remains to be seen whether Brussels IV will be applicable within the UK. It will not be applicable here unless the UK decides to opt in, either within three months of the publication of the draft Regulation or when the Regulation is finally agreed and adopted. At the time of writing, the initial three month deadline has not yet expired but it seems clear that the UK will not opt in at this stage, although it may seek to participate in the negotiations and consider opting in at the end of the process.

Even if the UK does not opt in, Brussels IV will apply in all other EU member states except Ireland (which is subject to the same opt in provisions as the UK) and Denmark.

However, the Regulation’s indirect impact will be global; if the PIL rules of a jurisdiction outside the scope of Brussels IV refer to the law of an EU member state to which the Regulation applies, the applicable law will be determined by the rules in Brussels IV. Individuals with cross-border issues and their advisors must therefore get to grips with the potential impact of Brussels IV and consider making preemptive choices of law in wills and inheritance contracts.

COM(2009)154 final http://ec.europa.eu/ civiljustice/news/docs/succession_proposal_for_ regulation_en.pdf 2 Re Annesley [1926] Ch. 692 1

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IFC Review • 2010

Asset Protection in the United States

by Prof Denis Kleinfeld, Of Counsel, Kopelowitz Ostrow Ferguson Weiselberg Keechl, Ft. Lauderdale, Florida, USA

Introduction

The ‘litigation crisis’ which has hampered the United States (US) in the past is increasing exponentially as the financial meltdown, foreclosures and bewildering governmental actions are piled upon threats to our financial security and well-being. For anybody resident in the US, anybody coming to these shores, or anybody even investing here, lawsuits can be filed under almost limitless theories of liability. Nearly all business people, professionals and even retired people are worried that they will not be able to protect their money and other assets from the creditor confiscation system which in the US is called litigation. Everyone wants to keep whatever amount of hard-earned wealth they have managed to accumulate after tax, or were fortunate enough to inherit.

For these people, in the US as elsewhere around the world, asset protection is the number one priority after good health.

Each case is unique and there is no one-size-fits-all solution. Asset protection for legal liability requires a thoughtful and contemplative approach which takes into account a number of factors such as the nature of the liability exposure, the expected frequency of occurrence and the severity of potential loss.

These factors must then be balanced on the basis of a cost/benefit analysis of the

available risk management tools or legal liability protection strategies that can be used. Most importantly, all of this planning must take into account an understanding of the human dynamics and dysfunctions involved.

Two Thoughts of Caution

It should be made clear right from the beginning that asset protection planning does not hide assets. Secrecy is a myth, and anything that can be known, will be known. The reality is that a creditor can take the debtor’s deposition and ask him, “and what did you do with all your prior assets?” Now the debtor has the choice of telling the truth or engaging in perjury which may lead to even more serious consequences.

Asset protection planning cannot be used to evade tax. Under the reporting regime that exists today there is a significant degree of reporting and filing that is required. Failure to comply may involve the imposition of civil or criminal penalties (or both) for the person/s whose assets are being transferred as well as for any others who may be responsible for making filings with the relevant tax authorities. These penalties are in addition to any which may be imposed under money laundering laws and other federal or state statutes.

It is important to understand that

Asset Protection

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IFC Review • 2010

tax laws and other relevant statutes do not obstruct proper asset protection planning, including the use of offshore centres. What is required is correct and timely filing of tax forms, payment of the proper amount of taxes, or making required informational disclosures. If nothing else, the recent tax laws underscore the legitimacy of asset protection planning when done in proper compliance with applicable laws.

Fraudulent Conveyance Law Considerations

Essentially, fraudulent conveyance law is applied under two separate sets of law in two different legal forums.

First, are the Uniformed Fraudulent Conveyance Act or the Uniformed Fraudulent Transfer Act, which are state laws, and may be applicable during the normal course of state litigation prior to bankruptcy. These are not the only state laws which may be applicable. Second, is the Federal Bankruptcy Code, which applies a form of fraudulent conveyance law, and may impact the state’s application differently from state to state. In fact, case law, even under the Uniform Acts, will vary from state to state. The older decisions, of course, will have to be compared to relatively recent decisions by the US Supreme Court and precedents in other courtrooms which impact creditor-debtor law today.

However, whether under state law or federal code the protection of creditors’ rights is premised upon the ability of the creditor to challenge transfers of property. What a fraudulent conveyance simply means is that a creditor can go after assets even if they are transferred out of the control of the debtor. This legal mechanism enables a creditor to gain control of the assets or obtain powers over the person or entity who controls the assets. Where the creditor can obtain jurisdiction, then the fraudulent transfer statutes can possibly negate the transfer of the property by the debtor/transferor to a transferee.

Because the fraudulent conveyance or fraudulent transfer law is a remedy, the focus is on insolvency. If the creditor can prove that the debtor/transferor transfers rendered them insolvent or unable to meet their obligations, then the courts may apply a remedy allowing the creditor to recover the property from the transferee.

Strategies for Asset Protection

Employing good risk management

will help minimise the adverse impact of losses. This is true whether the risk is physical, economic, tax or legal liability. The best asset protection plan is one which involves a planned action that avoids problems entirely, limits their frequency or severity, or has preplanned the paying of associated costs.

An exposure not identified does not go away. Risk management provides the risk conscious an opportunity to make a decision on how to handle or deal with identifiable areas of risk.

Ownership of assets requires that property title and control be properly thought through. While real estate lawyers, corporate lawyers and others have a great deal of intimate knowledge about their own areas of law, their considerations in how properties should be owned, titled or controlled is generally not directed towards the objective of protecting those assets from creditors.

Real estate lawyers, for example, focus on the quantity of property and the quality of title. Corporate lawyers focus on due diligence. The clients, of course, think of nothing but having property placed under their own name – after all, they do own it. How to own property is really an asset protection issue.

Limited liability entities such as limited partnerships and limited liability companies have become favoured methods of owning property. There is the possibility of employing other structures, such as a statutory land trust, in a limited number of states. With a statutory land trust, legal and equitable title are held by the trustee, so the beneficiaries do not have an interest upon which a creditor could attach. Effectively, the creditor is left with getting a charging order, which would be the same outcome with a limited partnership or limited liability company in general.

The Internal Revenue Service (IRS) issued a rule a number of years ago that held that a creditor obtaining the charging lien would be liable for the taxes on the share of income even if there was no distribution of that income. The ruling applied to a partnership but the principle may be applied, it seems, to any transparent entity. Where there is enough money involved, this alone could be a decided disincentive to a creditor.

Insurance is an important part of asset protection. In fact, insurance seems to be the most popular risk-transferred device ever devised. The critical point in obtaining insurance is to make sure that it actually insures all the risks that

are expected. There are numerous types of insurance, each with their own special benefits as well as limitations. It has been said, perhaps with tongue in cheek, that insurance companies obey the three D’s – Deny, Delay, and Don’t pay. With this thought in mind, it is important to acquire insurance of the kind that will actually pay when the claim is made.

Many states have exemption laws which favour insurance and annuities by providing that they are at least partially, if not fully, exempt from creditors. Annuities provide one of the most financially effective income tax deferral mechanisms allowed. Life insurance is the guarantee that the correct amount of liquidity necessary to pay estate tax or other estate needs at death will be available at the right time. The common practice in the US is for estate-planners to use an irrevocable life insurance trust, whether onshore or offshore, to own or to take or to receive the proceeds of life policies. Placing insurance into an irrevocable trust, particularly offshore, will help protect the assets and limit their reachability by creditors whether under an exemption law or under a fraudulent transfer action.

Exemption planning under state law is a straightforward and effective means of protecting assets from creditors. All states allow some forms of assets to be virtually exempt from creditors, though these vary quite considerably from state to state. For example, states such as Texas and Florida allow houses which qualify as homestead to be fully exempt regardless of value from creditors, while other states allow the homestead to be exempt only to a limited amount of value.

Wages, life insurance, annuities and an odd assortment of other assets are also potentially exempt. Funds held in qualified retirement plans can also be exempt from creditors. While retirement plans under federal Employee Retirement Income Security Act (ERISA) law are exempt in all states, there is no simple general rule even for states which provide retirement plan exemptions – each state must be carefully analysed and then compared against the impact of federal bankruptcy law.

Offshore trusts for wealth protection have become a popular planning technique. Now that the IRS has provided specific forms for reporting on the transfer of assets to a trust, the trust vehicle has become more mainstream, a standard estate planning and wealth protection planning vehicle. It is particularly

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IFC Review • 2010

in a suitable jurisdiction.

Goals of Asset Protection

Asset protection planning against legal liability requires that any plan integrate with standard income and estate planning strategies. It is part of a deliberate and conscious process to enable anyone to possess, accumulate and protect property. Having financial security is essential in creating a psychological assurance that goes along with achieving peace of mind.

Nothing is achieved without a cost, in terms of money as well as time. It does little good to pay this cost when all may be lost to a creditor because of an occurrence which was unintended, unexpected or unforeseen. Yet these events regularly occur at the most inopportune times. The art of planning is not to ignore controversial problems. Indeed, the whole underlying concept of asset protection planning posits that there will be legal and personal problems and difficulties somehow and in some way.

The more successful plans for protecting assets from legal liability are contained within a user-friendly structure. Any plan which is overly complex becomes inefficient, generally overly

expensive, and ultimately not successful. Although complexity is sometimes required because of the impact of tax law or other considerations, a successful overall plan generally has a strong sense of aesthetics and symmetry.

Conclusion

For those involved in asset protection planning, what is important is enabling their client to retain wealth, if for no other reason than professionals like wealthy clients who can continue to pay their fees! The fact is that, without retained wealth, no other estate, tax, or financial planning is needed.

What good asset protection planning comes down to is integrating the traditional financial or business plan (as drawn from the regular lawyer’s point of view) with a plan that includes the litigator’s point of view. We are living in tumultuous and unpredictable times. It is clear that we must look to placing assets where they cannot be taken away or lost.

Protecting assets, whether physically, economically, from taxes or from legal liability, is the key to surviving the maelstrom that is impacting upon the US – and virtually everywhere else in the world.

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Asset Protection

useful for liquid assets such as cash, traded securities, and financial instruments.

It seems only logical that if someone is going through the process of doing an estate plan and is using an inter-vivos trust for all the benefits that can be gained from that exercise, then it makes little sense to maintain the legal jurisdiction of the trust in the US – where the trust assets are exposed to creditors – when the benefits of asset protection can be gained by merely making the trust subject to a different legal regime in a more protective jurisdiction.

A number of jurisdictions outside the US, as well as a number of states within it, have established updated trust laws which provide specific protections to limit the ability of creditors to attack trust property. When people realise that it may not be legally possible to protect from confiscation the assets of even a modestly wealthy person subject to the US courts and legal process, then if any protection exists at all, it lies in making the assets legally unreachable by judgment creditors. If legal unreachability is the objective, then the planning solution may be to place assets in an asset protection trust or other asset protection entity

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IFC Review • 2010

Practical Guide to Domestic and Foreign-Based Asset Protection Techniques

by Howard S Fisher, Esq1, Beverly Hills, USA and William K Norman, Esq2, Partner, Ord & Norman, Los Angeles, USA Introduction

Asset protection is the lawful transfer of assets or the establishment of a structure principally for estate planning or business purposes, and not principally for creditor protection reasons. Asset protection, as the phrase implies, is the practice of using a variety of techniques and strategies to conserve accumulated wealth from involuntary transfers to ‘others’. This article will explore some of the fundamentals of the subject.

Asset protection is not an art, but a science built around a thorough knowledge of multiple aspects of the law (eg, litigation, contracting, corporate and taxation), as well as an understanding of rules of multiple jurisdictions, both foreign and domestic.

The Asset Protection Process in a Nutshell

Planners need carefully to qualify a client who intends to restructure the ownership of assets or the transfer of assets.

There are two reasons the practitioner needs to take care in advising a client: the numerous civil and criminal viola-

tions that could occur in advising a client in the wrong situation; and the potential liability to the client incurred by not meeting their expectations. These are not the only details a practitioner should be aware of, though. The following is what amounts to a checklist for the astute: • the client should be proceeding with the transfer or restructure primarily for reasons unrelated to creditor protection – the so-called ‘business purpose’. Specifically, the transferor should not have the specific intent to hinder the collection of debts by any foreseeable creditor. Taking on a client – deciding which clients not to represent – is often the most important decision the advisor has to make; • the client should not have present creditors including persons with unliquidated claims that will be hindered or disadvantaged by the transfer or restructure: • the client needs to be fully informed as to the limitations, risks and financial burdens of asset protection planning.

This must be done in writing; and • the client needs to be psychologically and financially prepared, if the need should arise, to engage in litigation over the propriety of transfers and restructures. They may well need to meet heavy evidentiary burdens to avoid being held in contempt of court should they refuse to make available funds transferred outside the jurisdiction.

The advisor should obtain a ‘declaration of solvency’ and other representations from the client, in writing, so that if necessary the advisor has the requisite information to defend them-

selves if the client’s information about their financial affairs later turns out to be ‘inaccurate.’

Potential Candidates for Asset Protection

In a sense, asset protection is designed to insulate the client from the claims of ‘others.’ These ‘others’ may include: • spouse: to minimise claims by a spouse raised by a future marital dissolution proceeding (consider ‘premarital’ or ‘post-marital’ agreements which have the effect of minimising the impact of otherwise applicable marital rights laws, such as the community property regime).

Spouses often have extraordinary right to discovery/information which other creditors do not have access to, and courts often craft extraordinary remedies to protect a spouse; • creditor of a child: to minimise risk of claims by a creditor of a child to whom a gift is to be made (consider making gifts to trust with spendthrift and/or discretionary features), or from the errant actions of the child themselves; • clients of a professional: to minimise risk of claims of future clients and patients (consider a marital property division, establishment of a private retirement plan and/or a so-called domestic asset protection trust, and employ liability limiting contractual provisions in the engagement process); • future creditors of a new business owner: to minimise risk of claims of future creditors (consider use of an LLC, marital property division, establishment of a private retirement plan and/ or a domestic asset protection trust or foundation, and have adequate

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IFC Review • 2010

The Planning Process

An often overlooked aspect of asset protection is ‘risk management.’ The client should evaluate the sources of potential liability in their personal and business life.

The attorney should advise as to actions to limit liability. This could be as simple as carefully crafting agreements between the client and their customers (eg agreement between physician/patient, or landlord/ tenant), or it may require restructuring of business operations.

The second consideration is to be sure the client obtains and maintains adequate insurance against as many risks as are foreseeable. In today’s litigious society the cost of defending a claim can sometimes be worse than the ultimate liability. Hence the need for

insurance that provides both defense and indemnification.

When it comes to the actual planning, most asset protection strategies involve one or more of the following concepts: • maximisation of the value of exempt assets under the law of the jurisdiction of residency; • change of non-exempt assets to exempt assets as permitted under applicable law; • transfer of outright ownership of assets to another person as permitted under applicable law; • transfer of assets to a trust for benefit of another person with limited exposure to the creditors of beneficiaries; • change of the legal form of ownership without significant loss of economic benefits; • change of ownership of assets so as to require any future claimants to proceed under another legal regime (import foreign law); and • change of situs of assets so as to subject the assets to another legal regime (export assets).

Techniques

A short list of techniques often employed for asset protection includes the following: Basic Estate Planning Techniques with Asset Protection Benefits; Outright Gifts; Gifts to Irrevocable Spendthrift Trust; Charitable Trusts (Lead or Remainder); Qualified Personal Residence Trust (QPRTs); Intervivos Irrevocable Trusts with Spendthrift Clauses; Bypass (Exemption) and Marital (QTIP) Trusts with Spendthrift Clauses; Disclaimers; Limited Powers of Appointment; Qualified Retirement Plans and IRA’s Core Domestic Asset Protection Techniques Adequate Insurance Umbrella; Fictitious Name Holding Vehicles; Lease Not Buy; Leveraging Down of Values; Prenuptial Agreement; Corporate Holding of Assets; Community Property Division; Multiple Legal Entities; Homestead for Family Residence; Exemption for Wages; Exemption for Annuity Contracts; Exemption for Private Retirement Plans Major Financial Planning Techniques with Asset Protection Benefits Tenancies by the Entirety for Property in a Qualified Jurisdiction; Family Limited Partnership; LLC; Alaska, Delaware, Nevada, Wyoming or South Dakota Domestic Asset Protection Trust (see attached chart comparing domestic jurisdictions); Redomiciliation to a Major Exemption State; Foreign Irrevocable

Trust; Civil Law Foundation; Nevis Single Member LLC. Unfortunately, as with any benefit, there are often offsetting liabilities.

Below is a partial list of some of the countervailing considerations that go into a benefit analysis of any type of asset protection planning: Fraudulent Transfer Act; Information Disclosures – Creditor Exams and Discovery Orders; Loss of Direct Control; Risk of Civil Contempt by United States (US) Court; Risk of Receivership over US Situs Assets; Anti Money Laundering and Racketeer Influenced and Corrupt Organisations (RICO) Statutes; Regulation of Assisting Professionals; Freeze Orders by Court; Disregard or Sham Treatment; Constructive Trust Over Assets in Trust; Tolling of Statute of Limitations; Reconstruction of Trust Terms by Beneficiary Action; Recognition of California Judgment in Another Jurisdiction; Recognition of Trustee in Bankruptcy; Establishment Costs; Maintenance Costs; Compliance Costs; Future Litigation Defence Costs.

Domestic Structures

Planning is often divided between ‘on shore’ strategies and ‘offshore’ techniques.

Many of the ‘onshore’ or domestic structures are concepts that attorneys have used for decades, sometime centuries, without thinking of them as asset protection vehicles (eg, pre or post-marital agreements). Some of the key domestic strategies that are employed include: • the use of federal and state ‘exemptions’ from creditor claims (eg, pension plans and homesteads); • contractual provisions to limit liability (eg, waivers, limitation on damages and choice of law); • use of legal entities to provide a shield from claims and to limit direct access to assets held in a legal entity (eg, LLC’s); • use of the common law trust as both an estate planning and asset protection vehicle (‘integrated estate and asset protection planning’); and domestic ‘self-settled’ spendthrift trusts, (eg, asset protection trusts typically established and administered under the laws of Alaska or Delaware).

Foreign Structures

Foreign structures tend to be more exotic, and are typically formed in jurisdictions that have specifically enacted ‘designer’ law specifically tailored for asset protec-

Asset Protection Techniques

insurance); • tort claimants of an owner of high-risk business: to minimise risk from future tort claimants (consider a marital property division, holding assets in multiple entities, establishment of a private retirement plan and/or a domestic asset protection trust or foundation); • buyer of a business: to minimise risk of claims against a buyer of a business for breaches of warranties and representations of the seller (consider establishment of a private retirement plan and/or a domestic asset protection trust); • tort claimants: to minimise the risk of future tort claimants (consider marital property division, establishment of a private retirement plan and/or a domestic asset protection trust); • contractually based claimants: to minimise the risk of contractual claims (consider including special protection clauses in contracts); and • governmental agencies: to protect against future claims by governmental agencies, eg, the Internal Revenue Service (IRS), Resolution Trust, the state tax authorities and environment-based claims (use extreme care before even considering planning to protect assets against governmental claims – such action can result in criminal liability, eg, hindering or money laundering).

It is not appropriate to employ asset protection techniques to defeat existing or reasonably anticipated governmental claims. It is a crime to inhibit collection of obligations to the US government – see discussion below, eg: IRC §§ 7201 and 7212, 18 U.S.C. § 371, 18 U.S.C. §§ 1956 and 1957, 28 U.S.C. § 3301 et seq.

Asset Protection Techniques

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IFC Review • 2010

tion. The most notable of these is the Cook Islands, which initially created its asset protection trust laws at the request of several attorneys who were seeking the ideal jurisdiction. Over the years, the Cooks have amended their laws to address issues that subsequently arose (eg addressing community property issues).

Foreign strategies include: • use of a foreign entity, such as a trust or civil law foundation, often established in a jurisdiction with ‘designer legislation’ created specifically for asset protection (recently the Antilles and Panama enacted asset protection ‘foundation’ laws); • annuity contracts; and • insurance arrangements.

Often, foreign structures are combined with domestic techniques, for rarely is there a single action item solution to most problems.

• typically, there are no statutory exceptions to the fixed period of the statute of limitations applicable to actions against the transfer; • typically, full protection is available under foreign law until actual distribution is received, even if the settlor is entitled to a fixed benefit; • typically, the settlor may have a power to revoke subject to an anti-duress clause without loss of protection under the laws of the governing jurisdiction.

Even though a classically designed offshore asset protection trust or foundation may be an effective shield against creditor claims, the risk of imposition of court contempt may be unacceptable to many US settlors. However, a properly presented showing of impossibility is a valid (even constitutionally protected) defence.

Foreign vs. Domestic

Potential Problems – Limitations on Asset Protection Structuring

Many practitioners claim that there are distinct advantages of using an offshore structure, such as ‘designer laws’ which are more suited to asset protection.

Some of these laws include: • elimination or restrictions on flatulent transfer principals; • short statutes of limitation; • requirement of a bond as a condition of any litigation against a trust; • presumption of validity of the structure.

Five of the main reasons to avoid an offshore structure include: • lack of knowledge of foreign law and different legal system; • greater costs; • the client’s feeling of total lack of control; • enhanced IRS and other reporting required; and • uncertainty of how the structure will be treated by a United States (US) court.

For example, Stephen Lawrence moved assets to an offshore trust, then filed for bankruptcy. The US Bankruptcy Court did not believe that Mr. Lawrence had parted with his assets, and jailed him for several years (In Re: Stephen Jay Lawrence (“Lawrence III”) 279 F.3d 1294 (11th Cir. 2002)).

Classically designed offshore asset protection trust (and now the foundation) remains the ‘top dog’ in many practitioners’ minds because: • typically, there is no local deposit or investment requirement under foreign law; • typically, there are no exceptions from protection for claims of creditors based on events or circumstances occurring after the transfer;

As many techniques as there are for asset protection, there are multiple limitations on asset protection strategies, each of which need to be explored both by the practitioner and their client. Some of the key limitations include: • federal criminal statutes (eg, Acts to Evade or Defeat Collection of Federal Taxes (IRC § 7201); Obstruction or Impeding Federal Tax Administration (IRC § 7212); Conspiracy to Defraud The United States (18 U.S.C. § 371); Hindering of the Collection of Debts by the Federal Government; Money Laundering (18 U.S.C. §§ 1956 and 1957); and Criminal Violations of the Federal Bankruptcy Act); • state criminal statutes (state criminal laws may apply to acts that hinder the collection of a private or state’s debts eg, California Penal Code § 531 – fraudulent transfers). The crime of participating in a scheme to defraud creditors (Cal. Pen. Code,§ 531) or the unprofessional conduct involved in an intentional and successful deception of a bank officer is grounds for disciplining an attorney.

Allen v The State Bar (1977) 20 Cal 3d 172. Note that many state statutes have extraterritorial application.); • often state substantive laws such as those relating to marital property and rights, trust and creditor rights, also have an impact; • fraudulent conveyance (transfer) statutes which generally prohibit the ‘transfer’ of assets if the principal reason is to prevent present or future creditors from gaining access to the debtor’s assets3. The courts

have long taken the position that a person cannot create a trust with his assets, retain a beneficial interest and have spendthrift protection against his own creditors, even if no fraudulent conveyance is involved. This principle is known as the prohibition on ‘selfsettled trusts.’ Some states have adopted laws allowing such trusts: • US constitutional principles (eg, full faith and credit) available to creditors; • conflicts of law principles; and • laws and rules regulating professional conduct.

Some ‘Dos and Don’ts’ in Trust Design

Reviewing the various domestic cases that have dealt with asset protection structures, the authors have developed a list of ‘dos’ and ‘don’ts’, as follows: • trustee should not hold assets physically located in the US in accounts with persons subject to the jurisdiction of US courts, in domestic legal entities; • at the time the trust is established, the drafting attorney should require the settlor to acknowledge in writing addressed to the trustee the extent of his or her retained powers, if any; • at the time the trust is established, the drafting attorney should require the settlor to confirm in writing the reasons for establishing the trust and the selection of the trustee including any motive to protect assets held in the trust against the claims of future, currently unforeseen, remote creditors; • at the time the trust is established, settlor should execute a statement of financial position and attach an accurate financial statement with full disclosure of any contingent liabilities; • neither settlor nor any person under his or her control should be appointed as co-trustee or protector with power to remove a trustee; • neither the settlor nor any US resident should have the power to determine in his or her own discretion whether an event of duress under the trust instrument has occurred; • under the trust instrument, the trustee should be authorised (but not required) to seek an order of a court sitting in the forum of the administration of the trust confirming the validity of any refusal to act because of the duress of a power holder; • settlor should retain copies of all trust documents and financial reports, eg, brokerage statements, and provide them if an appropriate request is made;

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IFC Review • 2010

Concluding Thoughts

The timely imposition of a solid asset protection structure can, in many situations, provide a near-impenetrable shield against erstwhile litigation.

However, an ‘after the fact’ restructuring, a poor structure or improperly implemented structure is doomed to failure and has the potential for liability on the part of the planner. As the French say – en garde.

Howard S. Fisher, is based in Beverly Hills, he is a member of the California Bar (Board Certified Taxation Specialist), and the Honourable Society of Lincoln’s Inn ([London, England - Student Bencher]). Mr. Fisher studied at the American College In Paris and received his degree from the University of Southern California in 1973. He studied law 1

at Southwestern University (J.D. 1976), the University of Cambridge, in England (LL.B. with honours 1977, Corpus Christi College), and completed post-graduate studies in international business and taxation at Harvard University Law School (PIL) 2 William K. Norman is a Partner of the California tax law firm of Ord & Norman, and he is based in their Los Angeles office. Mr. Norman is a Certified Specialist in Taxation Law. He is admitted to practice law in the states of California and Wyoming. Mr. Norman received an A.B. degree in Economics from the University of California at Berkeley in 1962,

a J.D. degree from the University of California in 1965 and an LL.M (in Taxation) degree from New York University in 1970. He also attended the Graduate School of Business of University of California at Berkeley and the Stern Graduate School of Business of New York University.

3 Sullivan, Future Creditors And Fraudulent Transfers: When A Claimant Doesn’t Have a Claim, When A Transfer Isn’t A Transfer, When Fraud Doesn’t Stay Fraudulent, And Other Important Limits To Fraudulent Transfer Law For The Asset Protection Planner, 22 Del J. Corp. L. 955 (1997).

Features of Self-Settled Trust Enacted in Selected Jurisdictions

Table of Features of Self-settled trust Legislation Enacted in Selected

Jurisdictions

Alaska

Delaware

Nevada

Rhode Island

Utah

Date Enacted

April 1997

July 1997

October 1999

July 1999

March 2003

Self-Settled

Need more than just settlor as beneficiary

Must expressly declare law √ √ applicable Cannot have fraudulent intent No badges of or intent to hinder fraud or delay Statute of 4 yrs - 1 2 yr - 6 Limitation yr from √ mo from Same as AL discoverable discoverable Protects against Not as to Not as to existing Creditors Not if 30 days alimony, alimony, in arrears of child No child child support support, or support, or tort claims tort claims Trustee - bank, trust co, resident √ √ √ √ of the state Power of Settlor to √ √ √ √ veto distribution Right of Settlor to Discretionary Up to 5% Discretionary √ distribution Protectors/ Advisors - right to √ √ remove trustee No suits against attorneys advisors √ √ √ √ who establish Mandate state law is ‘applicable’ for √ bankruptcy Must keep some √ √ √ √ assets in state Must administer, keep books and do √ √ √ √ tax return in state Term - Perpetuity As to √ personal √ property

3 yr - 1 yr from discoverable Unknown

√ √ √

√ √ √ √

Asset Protection Techniques

• settlor should cooperate in discovery or creditor’s exams and not conceal information concerning the trust during a bankruptcy proceeding or even during settlement negotiations with a creditor; • settlor should disclose his or her contingent interest in the trust in any bankruptcy petition; • at the time the trust is established, settlor’s counsel should prepare a brief supported by credible evidence and law of impossibility including legal opinions concerning rights of settlor and beneficiaries; • settlor should hire litigation or bankruptcy counsel who understands foreign trusts, who is willing to listen to the advice of experts including lawyers qualified in the jurisdiction whose laws are designed as the proper law, and who is willing personally to read the relevant court cases including but not limited to those cited herein and the pertinent parts of major journal articles and treatises in the area; and • under the trust instrument, the trustee should be specifically authorised to defend (directly or with financial support) against any lawsuit brought (i) to invalidate any transfer of assets to the trustee, (ii) to impose a constructive trust over any assets held in trust for the benefit of anyone other than a person named (or designated) as a beneficiary in the trust instrument, (iii) to invalidate the terms and conditions of the trust as set forth in the trust instrument itself, or (iv) to cause a distribution to any person other than an individual named (or designated by class) as a beneficiary.

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IFC Review • 2010

International Philanthropy: What has Changed Over the Last Twelve Months?

by Clive Cutbill, Consultant, Charities & Philanthropy Team, Withers LLP, London, UK

I

N IFC REVIEW 2009 (at page 27) I

wrote an article entitled ‘International Philanthropy: Territoriality, Local Benefit and a Changing World’. That article began with the words: ‘Even in times of profound global economic difficulties, philanthropy remains important to high net-worth individuals’ and went on to explain how the rules of ‘territoriality’ and ‘local benefit’ may affect donors who wish to give taxeffective financial support to charities on a cross-border basis.

Although the jury may still be out as to whether ‘green shoots of recovery’ are now emerging (and if so, whether they will be killed off by a further economic cold snap), it is interesting to consider how philanthropists have reacted to financial conditions over the last 12 months. Before addressing this issue and then turning to reflect on whether professional advisors are providing the advice clients need on philanthropy and whether they would benefit from doing more in that regard, it seems appropriate to provide an update on the developments in European cross-border giving in the last year.

Last year’s article described a number of developments which had taken place in European law in the field of ‘territoriality’ in relation to cross-border charitable giving. It ended with a reference to the Advocate General of the European Court of Justice (ECJ) having given his opinion in October 2008 in the case of Hein Persche v Finanzant Lüdenscheid (C318/07), which concerned the question of whether, for a tax deduction to

be available for a donation to a charity, it was necessary for the charity to be established in the state which was being asked to give the tax deduction. In his opinion, the Advocate General followed the ECJ judgment in the case of Centro di Musicologia Walter Stauffer v Finanzamt München für Körperschaften (C386/04), which had held that where favourable tax treatment was sought for the income and capital gains of a charity it was not necessary that it should be established in the state which was being asked to give the favourable tax treatment, so long as it was ‘equivalent’ to a charity established in that state and was established in one of the member states of the EU. In January 2009, the ECJ gave judgment in the Hein Persche case and followed the Advocate General’s opinion, holding that a donor should not be denied a tax deduction for a gift to a charity established in another EU member state simply because the charity was not established in the member state in which the donor was seeking the tax deduction. In other words, the concept of ‘territoriality’ was widened so that member states were expected to afford equivalent tax treatment not just to the income and gains of charities, but also to donations made to charities which were established in other member states if they would have given favourable tax treatment for the income and gains of, or a deduction for a gift to, that charity had it been established in their own state.

How, then, has this been received within Europe?

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IFC Review • 2010

permits non-Dutch charities to establish their credentials with the Dutch tax authorities); Germany is seemingly trying to find a solution which is unlikely, in practice, to see it having to give favourable tax treatment to charities from other member states or to those donating to them; while the UK and Ireland are continuing to take no action. It seems likely, however, that the UK, Ireland and the other states which have been holding out against the concept of what might be called ‘pan-European territoriality’ will ultimately have to accept the principles laid down in the Hein Persche case, perhaps adopting a similar approach to that of the Netherlands.

Meanwhile, how has the recession affected levels of philanthropic giving? It will come as no surprise to discover that when money is tight the ability and willingness to give of many donors reduces. Indeed, reports in both the United States and the UK indicate that the rate of cancellation of relatively small regular payments to charity has increased substantially over the last 12 months.

At the other end of the spectrum, however, there is evidence of two, seemingly counter-intuitive, developments. First, reports suggest that a number of foundations, which might have been expected to be seeking to maintain the value of their own funds when times are hard, are in fact making more distributions to charities. Secondly, there is evidence that some substantial donors have increased their charitable giving, notwithstanding the economic downturn.

Fundamentally, the reaction of donors seems very much to depend upon their commitment to philanthropic giving.

Whilst those who might have made relatively modest contributions to a charitable appeal or who have made regular, but small, contributions to charity may be cutting back on their philanthropy, many of those who have historically made more substantial donations and who may be seen as particularly committed to the causes they have supported, have maintained their giving. At a basic level, one could say that this is not altogether surprising: those with the most money (who have historically made the biggest donations) might be expected to have suffered relatively less overall than others. As one donor reportedly put it: “my net-worth may have fallen from GBP1bn to GBP700m, but I have still got GBP700m!” What is interesting, however, is that it appears from anecdotal evidence which research reports have

subsequently bolstered, that some of these more committed, high net-worth donors have actually increased their giving in the recession, recognising that the causes to which they are deeply committed are facing both an increase in demand for their services and a reduction in giving from those whose commitment is less or who can simply no longer afford to make the contributions they previously made.

What is certain is that, as times have become harder, donors have remained keen to ensure that the funds they make available are given tax-effectively and to projects and recipients who will use the money wisely; and it is, of course, here that professional advisors can help.

Much research has been carried out over the last year into the question of how much advice is available to donors from their professional advisors in relation to philanthropic activity. In the UK at least, research indicates that there is less advice forthcoming from professional advisors on this subject than the desire of their clients to engage in philanthropic activity might suggest should be the case. As a result, a number of moves are now afoot to encourage professional advisors to engage with their clients to help them achieve their philanthropic aspirations and some advisors are beginning to understand the value to their own businesses of being able to help their clients in this respect, not just in relation to the direct fee income which advice of this nature may generate, but also in terms of the enhancement of the relationship between the advisor and the client.

At a time when the rules in relation to charitable giving are in flux, high net-worth donors remain keen to make a difference to those causes which they consider important and while not every professional advisor may be in a position to provide the advice which those donors need, those advisors who are may have an edge. The roles which professional advisors will play will vary and not all will wish, or be able, to provide detailed advice in relation to the structuring of gifts. However, even if you have to admit to your client that you cannot yourself provide the solution to a specific aspect of his or her philanthropic problem, it may well stand you in good stead if you can add, in the words of the UK Automobile Association’s advert: “but I know a man who can”. © Clive Cutbill, Consultant, Charities & Philanthropy Team, Withers LLP 2009

International Philanthropy

Having now lost two cases on the point in the ECJ, Germany has hardened its position, changing its law to introduce a ‘local benefit’ test which, while not directly precluding ‘equivalent’ treatment for the income and gains of (and gifts to) non-German charities, some have suggested is designed to ensure that, in practice, German tax advantages are only enjoyed by charities, and in respect of gifts to charities, which are German. Some German commentators have expressed doubt as to whether or not this rule will ultimately be found to comply with European law.

In November 2009, France was sent a ‘reasoned opinion’ by the European Commission (akin to those previously issued to the United Kingdom (UK), Germany and Ireland), asking it to remove the discriminatory aspects of its law which restrict the availability of tax deductions for charitable donations to donations made to French charities. My firm had already seen cases in which French revenue officers had given ‘equivalent’ tax treatment to gifts to nonFrench charities and, although the UK and Ireland have yet to give any indication that they will comply with the ‘reasoned opinions’ sent to them (in 2006), it is understood that France now proposes to change its law to comply with the judgments of the ECJ. Meanwhile, in September 2009, a Belgian Court had found in favour of the Great Ormond Street Hospital Children’s Charity in its claim to be accorded equivalent inheritance tax treatment for a testamentary gift made before the date with effect from which Belgium had agreed to afford other member states’ ‘equivalent’ charities the same inheritance tax treatment as Belgian charities. Interestingly, a few months before judgment was obtained in that case, following the intervention of the Belgian Ombudsman and without the need to launch Court proceedings, my firm (working with Belgian advisors) had been successful in persuading the Belgian tax authorities to treat a testamentary gift to three English charities, similarly made before Belgium had changed its law, in exactly the same way as a gift to a Belgian charity on the basis that the ECJ’s recent judgments overrode Belgian domestic law.

It is clear, therefore, that different states within Europe are taking different approaches: Belgium and France are liberalising their approach, falling into line with the Netherlands (which already

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IFC Review • 2010

Asian Regulation in the Year of the Tiger: Pussy-Cat or Man-Eater?

by Alan Ewins, Partner, Allen & Overy, and Head of Allen & Overy’s Asian Financial Services Group, Hong Kong

A

FTER A TRAUMATIC YEAR or so

in the global financial markets, there now appears to be general agreement that the market turmoil is essentially over. How has the financial crisis and its aftermath manifested itself in Asia, and how will the regulatory landscape change going forward, now that we are approaching the Chinese Year of the Tiger? Will the markets be mauled by excessive regulation?

It is clear that a fine balance needs to be reached among various competing pressures and political wishes in the region in terms of market reform of regulations. The various political obligations created by the G20 and the Financial Stability Board processes, and the increased prominence of IOSCO, have worked their way into Asia by various means. There is an underly-

ing fear of protectionism and regulatory arbitrage across the Asian markets, given the need for Asian jurisdictions to maintain their competiveness on the world financial stage.

Overlaying all of this are two additional considerations, both major: firstly, the need to recognise that for the most part the fall-out from the market crisis related to different areas of concern – in the ‘Western’ jurisdictions (principally the United States and Europe, particularly the United Kingdom), the greatest pain arose from prudential issues relating to capital and liquidity and the systemic issues created by a range of factors. The international response has been highly focused on this: pro-cyclicality, capital reform (more changes to Basel), accounting and the identification of villains of the

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legislation as well as the relevant codes and guidance. The investor protection regime is also set to be enhanced by the mooted introduction of an Investor Education Council and a fully-fledged Financial Ombudsman scheme, intended to provide a swifter and cheaper means of redress for investors along the lines of a number of other jurisdictions.

The HKMA has been consulting in relation to the risk management aspects of the remuneration policies of banks (the first Asian jurisdiction to tackle this issue full-on).

A significantly tougher stance on market misconduct, including insider dealing, has led to a raft of convictions over the past year or so, including the recent convictions in the Asia Standard Hotel Group case (the largest market manipulation case in Hong Kong judicial history). When combined with the antimoney laundering consultation exercise just completed to meet Financial Action Task Force requirements, it seems clear not only that Hong Kong is taking firm steps to deal with its own perceived regulatory issues, but it is also striving to meet its international obligations with an eye to future conditions on the international regulatory landscape.

What of elsewhere in the region? Set out below are views on other major financial centres in Asia and how they have reacted to the crisis.

Hong Kong

Singapore took a fairly similar approach towards the crisis as Hong Kong, having had its own significant share of minibonds problems. Its moves toward market reform in relation to structured products have mirrored Hong Kong’s developments in many respects, covering such things as product summaries and cooling off periods.

The enforcement approaches in the two jurisdictions as regards arriving at a resolution of the minibonds problems have, however, differed markedly.

Hong Kong procured monetary settlements from distributors while investors were required essentially to ring-fence the problem, cauterise the wound and move on; the Monetary Authority of Singapore (MAS) took a different path, disciplining the distributors for their failings and leaving it to investors to seek their own redress.

Not surprisingly, the MAS has also issued guidelines in relation to fair outcomes for investors (mirroring, for example, the Financial Services Authority

Hong Kong is a case in point.

At the end of 2008, the main regulators – the Securities and Futures Commission (SFC) and Hong Kong Monetary Authority (HKMA) – produced reports to the Hong Kong Financial Secretary which were designed to provide insights into the Lehman minibonds case and how the regulatory regime could address the issues raised by it. No mention was made of capital requirements or other prudential issues, for that was not what they intended to address: the Lehman mis-selling aspects were centred in the regulators’ radar screen.

Since then, following a ‘soft’ consultation process with certain industry participants, a full-scale, multi-pronged consultation programme has emerged which is intended to address issues in relation to sales of structured products (such as minibonds) in Hong Kong.

There are, coupled with potential regulatory changes, potential changes to the

Singapore

developments in the UK), together with enhanced licensing and notification changes designed to improve investor protection.

It is worthy of note, again by way of resonance with Hong Kong, that Singapore has recently commented on the bankers’ pay debate essentially by rolling its response into the incoming corporate governance measures to be adopted early this year in Singapore.

The issue has been marked on the MAS ‘to do’ list, but without having gone through a public consultation process as such.

PRC

China appears likely to forge its own path in terms of regulation, given its strengthening role in the international economy and the correspondingly weakened influence of Western regulators following the global financial crisis.

According to the preliminary version of the OECD Regulatory Reform Review for China, (‘Defining the Boundary between the Market and the State’), “China’s regulatory reform has made impressive progress over the past decade and is gaining momentum. Much remains to be done, but a very good foundation has been laid”. Most commentators would tend to agree with this.

On one hand, there have been increased requirements for liquidity and credit control stress-tests for banks, derivatives documentation advances and other developments. (Interestingly, Chinese banking regulators have issued statements essentially requiring PRC banks to ‘top up’ their capital adequacy positions to cater for the increased lending and asset quality issues that have cropped up in recent months in the context of the market turmoil.) On the other hand, there is an element of ‘watch this space’ as regards disputes arising between Western financial institutions and domestic State-Owned Enterprises (SOEs) from loss-making derivatives contracts. The degree to which SOEs ultimately keep to the terms of their transactions, or otherwise reach an appropriate accommodation with their counterparties, will have implications going forward for business in the PRC. The recent accommodation reached between disputing parties has been given a guarded welcome.

A further point to bear in mind is the interaction between the Chinese and Hong Kong regulators in relation to

Asian Regulation

piece along the lines of Christmas pantomime rascals.

In contrast, the main issues in Asia have related to the mis-selling of products to retail customers. The market turmoil meant large numbers of investors losing money on a range of financial products. For example, in Hong Kong, there were massive public protests in the wake of the Lehman debacle, culminating in the settlement reached with the distributors to compensate large numbers of the affected investors (even that settlement is currently subject to challenge, by way of judicial review in the Hong Kong courts, showing the depths of feeling generated by the crisis).

Accordingly, conduct of business issues, as opposed to prudential issues, has been at the forefront of the debate across Asia, and the differences in the nature of the two issues cannot be ignored in relation to the responses.

Second, there is a perceived need to ‘seize the moment’ in relation to making changes to the regulation of markets to head off as far as possible similar calamities in the future. How does that stand in relation to not hampering the economic position of the various jurisdictions? There is a degree of regulatory cat-and-mouse which can be discerned in the ways that various of the Asian regulatory regimes have started to address the bigger picture issues in play internationally.

Asian Regulation

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IFC Review • 2010

information sharing, which has become a feature of regulatory developments in the two jurisdictions, and demonstrates the ability of regimes to pool ideas for the sake of broader cooperation.

Korea is one of the other major Asian jurisdictions which has proven to be hungry for further international recognition of its efforts to modernise its regulatory system. Early in 2009, Korea adopted a raft of financial market reforms, including a desire to liberalise the offering of financial products in Korea by broadening the range of those instruments allowed to be offered. Previously, only those products which were specifically permitted to be sold in Korea were catered for by the regime, whereas under the reforms there was the ability to move into other product areas so long as not expressly prohibited. This is a much more flexible approach for market participants, and was widely welcomed. It was unfortunate that the reforms, contemplated for some time, were implemented at such an inauspicious stage of the economic cycle. On a cautionary note, there have been rumblings internationally, including in Australia, as regards the attractiveness of expressly curbing the distribution of some types of product to certain types of investors (for example, highly complicated products to retail).

As can be seen from this, there is never a single way forward on any of these issues, which can come down very much to timing as much as anything.

Ironically in the context of the planned enhanced role of Korea in the Asian markets, the controversy surrounding the issues created under the KIKO litigation (which related to instruments that took a view on the movement of the value of the Won, and which resulted in fiercely fought misselling cases in the jurisdiction) did not help the Korean cause.

The domestic banks are already catered for to some extent under Japanese regulations, but it is clear that this split will exercise the Japanese regulators going forward.

One of the more interesting aspects of responses to the crisis was the deconstruction of ‘firewall’ regulations, allowing banking and securities groups to provide more homogenised services to clients. This was instigated with a view to increasing Japan’s competitiveness as an international financial market. However, it came at a time when much has been made, during the course of the development of international thinking on market reforms, of the need for greater differentiation during the product-selling process of ‘classic’ banking (i.e. deposits and vanilla deposit products) from so-called ‘casino’ banking (i.e. more exotic products). For example, Hong Kong and Singapore have made express stipulations as regards the need to ensure clear water between the sales of banking and investment products. However, there is a desire in various quarters in the market reform debate to ‘simplify’ financial conglomerates, so-called ‘living wills’ being a case in point – the need to plan for an orderly wind-down of a troubled bank and, as part of that, the concept of putting arrangements in place to streamline the structure of complex banks. In the US, this manifested itself, for example, through plans in proposed reform legislation to allow regulators essentially to break up complex banks (even when they are healthy) where it is considered that the institution may pose a risk to systemic stability. That in itself could have practical knock-on effects for Asian branches and subsidiaries as and when there is any such ‘streamlining’ of operations.

These types of issue demonstrate the challenges of reaching broad consensus and implementation of reforms at an international level.

Japan

Indonesia

Japan has previously indicated that it has, in general, no objection to any statement issued in the G20 process.

The Minister of the Financial Services Agency, Mr Kamei, said that any capital-related issues under the Basel Accord, which is a central plank of the G20 reforms, should be applied to those Japanese ‘Mega’ banks that are carrying on international activities and not to the domestic banking market.

Arguably, Indonesia’s response to the market turmoil has been somewhat protectionist, given the introduction of requirements for the use of the Indonesian language in ‘commercial’ documentation. Insofar as international documentation has been impacted by this type of measure, there was a clear risk of sending an unfortunate message to market participants. On a separate note, there are various derivatives cases

Korea

currently on foot relating to suitability and mis-selling which tie into these general concerns.

Others

Developments in India have not tended to align with mainstream regulatory reform, but as and when they do begin to focus on this area, the implications for Asia, and indeed for international markets as a whole, are enormous.

Taiwan has been in a similar position to Korea in relation to derivatives contracts entered into by foreign institutions with Taiwanese entities.

Thailand is considering its options in relation to launching its own ‘Big Bang’, which would be designed to advance its interests as an international financial centre, but this seems to be in its early stages. In August of last year, the Bank of Thailand did implement some relaxations of the rules for investment in foreign securities and derivatives by permitting certain types of institutional investors (including Thai securities companies) to invest directly in foreign securities, allowing onshore banks to enter into certain derivative contracts and relaxing some of the restrictions on Thai residents entering into currency derivatives. However, it is fair to say from a more international perspective that Thailand’s involvement at the head of ASEAN in the G20 process has arguably been more in the context of the bigger picture International Monetary Fund and World Bank reforms.

A Thought for the incoming Year of the Tiger

It is clear from the above that we have reached a turning point in the development of the international markets.

There is a struggle in Asia between the creation of internationally coherent markets and, in some places more than others, the protection of the home patch. Developments in Asia needs to be viewed in that light.

The fragmented nature of the Asian regulatory landscape is likely to remain the rule rather than the exception. Domestic regulatory issues, albeit in the context of the international reforms, are likely to continue to be key, with the promise of significant waves of regulatory change in that landscape.

It remains to be seen whether the problems in the international markets can be tamed by regulatory reform in the Year of the Tiger, or whether they will bite back.

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IFC Review • 2010

Trust Planning in Asia

by Mary Ellen Hutton, Partner, Withers, Hong Kong and Philip Munro, Associate, Withers, Hong Kong

I

F THE PRIMARY RATIONALE for

the creation of trusts is their utility as vehicles for the devolution of family and commercial wealth, then trust planning in Asia should be becoming increasingly important with the ascent of Asia as a centre of global wealth. China and Japan represent two of the world’s largest four economies, the former alone now having an estimated 450,000 USD millionaires; India and Indonesia are also significant markets with wealth heavily concentrated in a developing class of globally wealthy entrepreneurs. While the growing concentration of private wealth in Asia might naturally lead to trust planning in any event, the strong desire to retain assets in family hands, found in many Asian cultures, makes the trust concept one that ideally suits many Asian families.

Trusts are a feature of the jurisprudence of a number of Asian jurisdictions, although in some countries their usage is more in the commercial, rather than the family, context. In this overview, we consider the trust laws in a number of Asian jurisdictions, showing that across Asia the full range of trust laws can be found.

Hong Kong and Singapore

Notwithstanding the return of Hong Kong to Chinese sovereignty, Hong Kong law remains, in large part, based upon English law. The Hong Kong trust law is contained in the Trustee Ordinance, Chapter 29 of the Laws of Hong Kong. This 1934 statute (which was amended to modernise the previous common law rule against perpetuities in 1970 by the Perpetuities and Accumulations Ordinance) is based on the English Trustee Act 1925 (a statute now largely superseded in England by the Trustee Act 2000).

Trust planning by Hong Kong residents used to be widespread as a way of mitigating estate duty exposure. Hong Kong estate duty was a progressive tax that rose to a top rate of 18 per cent.

Although estate duty was abolished with effect during February 2006 (as part of an effort to make Hong Kong a more attractive private asset management centre), many trusts created as part of estate duty planning persist and Hong Kong trusts are still created for succession planning purposes.

In practice, many Hong Kong residents using trusts for succession planning purposes do not choose to settle trusts governed by Hong Kong law, it being perceived as a proper law more restrictive than that found in other trust jurisdictions. In response to this trend, a consultation on the reform and modernisation of the current Hong Kong trust law was conducted during 2009, with a view to legislative amendments to the Trustee Ordinance being enacted in 2010 or 2011. The consultation has been wide ranging, considering questions such as whether the rule against perpetuities should be abolished, the in-

1

troduction of a statutory trustee duty of care and the merits of allowing for noncharitable purpose trusts.

Like Hong Kong, Singapore’s legal system was established while it was a United Kingdom territory. The Singapore trust law was, however, updated in December 2004 such that it now contains features found in the modern trust laws of some traditional offshore jurisdictions. For example, the Singapore Trustees Act expressly provides that a trust governed by Singapore law with Singaporean trustees is valid notwithstanding that the disposition creating the trust may be contrary to forced heirship rules to which the settlor was subject under their personal law, while s.90 of the Act expressly provides that settlor reserved investment and asset management powers will not invalidate a Singaporean trust. Singapore has no capital gains tax nor estate duty and the Singapore income tax regime is applied on a territorial basis such that it is an attractive fiscal jurisdiction for offshore trust planning.

India

The concept of the ‘trust’ entered Indian law during British rule with Indian domestic trust law contained in the Indian Trusts Act 1882: the 1882 Act applies, prima facie, to all trusts executed or situated in India and whose settlor, trustees and beneficiaries are domiciled in India.

It is understood, however, that, as a matter of Indian law, the proper law of a trust can be chosen by the settlor either expressly or by implication.

The Indian trust law expressly prescribes four essential requisites for the creation of any trust: the existence of the creator of a trust (i.e. there must be a settlor); a beneficiary for whose benefit the trust exists; trust property; and,

Trust Planning in Asia

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IFC Review • 2010

divestment of ownership between settlor and trustee. It includes the rule against remoteness of vesting such that, broadly, a trust cannot exist for longer than a life in being plus 21 years. There are also bars against excessive accumulations of income: broadly, income cannot be accumulated for more than 21 years or the settlor’s life in being.

In creating trusts for Indians, it should be noted that, although the concept of forced heirship is rare in India, it can apply to ‘ancestral’ and ‘coparcenary’ property (property inherited by a Hindu through his paternal line). Succession to coparcency property is governed by a specific personal law. The Indian exchange control position also needs to be considered in the international context. Where a trust has non-resident beneficiaries but holds Indian property, it may be possible for the beneficiaries to open non-resident ordinary accounts under the Foreign Exchange Management (Deposits) Regulations 2000 to receive distributions.

People’s Republic of China (PRC)

The PRC’s legal system is based on civil law concepts and, until recently, it contained no trust law features. The PRC created its Trust Law, however, in April 2001, bringing a form of trust concept into the PRC legal system.

As the PRC Trust Law stands, it expressly provides that a ‘trust’ is an arrangement whereby a settlor entrusts property to a trustee who has powers to manage or dispose of such property for the benefit of a beneficiary or for a specific objective. It is understood that to validly form a trust under the PRC Trust Law, property must actually be transferred to the trustee. The law requires that trust property is kept apart from the trustee’s own property.

A PRC trust must be created in writing with enforcement against the trustee being, in essence, a contractual matter (at least as between the trustee and the settlor). That said, the Trust Law specifically provides in Article 25 that a duty of skill and care is owed by the trustees to the beneficiaries of the Trust.

One of the weaknesses with the PRC Trust Law is that no specific tax regulations deal with the PRC tax treatment of trusts. Further, within the PRC, there is no significant wealth management or private client tax planning industry.

Where PRC nationals do look to trust plan, they have tended to seek advice outside China with the effect that the Trust Law is practically only relevant in

the context of trusts in the Chinese commercial, rather than the family, context.

Japan

Japan has a trust law that was enacted in 1922 following the Meiji period during which many Western legal concepts were introduced into the Japanese legal system. Trusts are, however, primarily used in the commercial context as vehicles to facilitate co-investment (as of March 2005 YEN60 trillion was held in Japanese investment trusts), for operating pension schemes and for employee benefit purposes. Although trusts are not used frequently in the traditional family trust form, ‘special donation trusts’ are sometimes created. These trusts can be created to benefit the mentally and physically disabled with there being an exemption from Japanese gift tax on their creation.

Labuan

Asia has some offshore financial centres that look purely to attract international business, an example being Labuan.

Labuan is a Federal Territory of Malaysia which was, in 1990, declared an international offshore financial centre and a free trade zone. Since its inception, Labuan has incorporated more than 6,500 offshore companies and has attracted more than 300 licensed financial institutions.

Trusts can be created in Labuan under the Labuan Offshore Trusts Act 1996 which came into force on 31 October 1996. A trust cannot be created under the 1996 Act by a citizen or permanent resident of Malaysia nor can such a trust own real property in Malaysia or have Malaysian beneficiaries. At least one of the trustees of a Labuan trust must be a company registered under the Labuan Trust Companies Act 1990 to carry on business as a trust company.

Labuan has recently amended its trust law (the amendments to be brought into force this calendar year) to include features such as: • statutory recognition of settlor reserved powers and of protectors; • a form of ‘special trust’ to hold company shares on terms similar to those found in the British Virgin Island’s VISTA legislation; • perpetual trusts; and • non-charitable purpose trusts.

New Zealand

New Zealand also lies in the Pacific region and its advantages as a trust planning jurisdiction have caused many

Asian families to use it as a jurisdiction.

New Zealand trust law is based on English law and the English rules of equity underpin the New Zealand trust regime, making its trust law attractive through this foundation body of jurisprudence. New Zealand has a favourable tax regime which provides that certain trusts will not be subject to New Zealand income tax. These trusts tend to be known to New Zealand trust practitioners as ‘foreign trusts’. To qualify as a foreign trust the settlor must not be New Zealand resident, the beneficiaries must not be New Zealand resident and the income derived by the trust must be from sources outside New Zealand. There is no capital gains tax in New Zealand nor any form of estate duty.

New Zealand is also attractive as a jurisdiction because of its private trust company regime. A New Zealand private trust company does not need to be licensed or specially exempted. There are no requirements that the directors or shareholders of a New Zealand private trust company be New Zealand resident nor have any New Zealand nexus.

There are significant differences, then, between Asian jurisdictions as to the forms of trust available and their usage. Hong Kong and Singapore have long established trust laws derived from British colonial rule: Singapore has updated its law to incorporate many modern trust law features, with Hong Kong set to follow suit shortly. India also has a developed trust law although it is not one that is likely to be chosen by settlors outside India. Both Japan and the PRC have recognised that there are merits in having a trust law for commercial trusts but their trust laws have not, for a number of reasons, developed to facilitate the creation of family trusts. Labuan represents a bold attempt to establish an offshore financial centre within the heart of South-East Asia. New Zealand also draws international trust business as a tax neutral jurisdiction.

Mary Ellen Hutton, Partner, and Philip Munro, Associate, Withers, Hong Kong (with assistance from Sebastian Brown also of Withers Hong Kong). This article does not contain legal advice: Withers Hong Kong practices as an international law firm in Hong Kong but does not provide Hong Kong law advice. This article is written from our perspective as international trust lawyers; not only can it not be relied on but it should be understood to contain only general statements of law rather than any detailed or substantive comment on Hong Kong law.

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IFC Review • 2010

Reflections on the Trust and the Future

by Nigel Goodeve-Docker, Solicitor, Hampshire, England

I

N THE DEVELOPMENT OF THE FACILITIES offered to individuals by the

offshore world, one can see part of the cause of the current onslaught by the major Western countries on the offshore centres.

The key to this development has been the speed with which communication difficulties have been overcome to the extent that today one can as easily do business in an offshore jurisdiction as in one’s own, coupled with the desire and ability of professional businessmen, both onshore and offshore, to promote the benefits of the offshore jurisdiction.

These benefits for individuals are principally: i) privacy, ii) security (or asset protection) and iii) tax reduction or avoidance (There is no significance in the order).

They are, however, not new.

Indeed, they were the main reason why one of the offshore world’s major weapons was developed by the late mediaeval Chancery lawyers in London in the 14th and 15th centuries – namely the Trust.

It has been estimated that, by the end of the 15th century, 70 per cent of all land in England was owned through a Trust.

It gave the privacy and asset protection needed in those troubled times, but it also deprived the Crown of the mediaeval equivalent of inheritance tax on death! Were any of those great lawyers (who practised without the aid of printers, copiers, computers, and the other toys of today) to be transplanted into the office of a legal firm offering the Trust facility, it would not take him long to recognise that this weapon is essentially the same as the device which he devel-

oped 600 years or more ago. Equally, he would recognise that the driving forces behind its use are much the same as they were in his time.

The causes for the 20th century promotion of the Trust are much the same as they were then – political instability, social upheaval and excessive taxation.

Then it was the Monarch needing the money, but now it is Government. In both cases overspending was/is at the heart of the matter, but in the latter case it was part of the search for greater public support and thus of the corrosive nature of political power. Human ambitions in general rarely change except in the packaging with which they are promoted, and this applies equally to the governors and the governed.

It may be difficult today to appreciate just how strong were the fears of the Cold War through the 1960s and 1970s and beyond (building on the cataclysmic upheavals of two World Wars) and the constant uncertainty as the Communist or Totalitarian systems sought to destabilise the West. At the same time, many Western peoples were flexing their ‘people muscle’ and demanding ever-increasing social benefits and security for the less advantaged. Social security systems absorb state finance at huge (and, ultimately, probably insatiable) levels, which have to be paid for with real money, which, it is believed, can be produced by taking money by taxation from those perceived to be able to afford it, i.e. the wealthy, and delivering it to those who ‘need’ it, conveniently forgetting that it is usually the wealthy who produce it in the first place and can therefore move or stop producing it if they wish.

Not surprisingly, individuals faced with these governmental attacks have sought to protect themselves and their families, by adopting measures to reduce liability to excessive tax, to reduce their exposure to expropriation risks from

political instability and to provide the safety of privacy in the face of increasing and intrusive means at Governments’ disposal to invade privacy with its loss of personal security.

One of these measures has been the use of the Trust. Although the Trust had been developed for these very purposes so many centuries before, its use through the 18th and 19th centuries had become confined (in the United Kingdom (UK) and its Empire extensions) to a safe and flexible method of protecting and securing succession to property (be it land or money). However, starting shortly before the First World War and increasingly in response to Government attempts to deal with its economic after-effects, UK lawyers began to use (or re-use) the Trust (as had their forebears) as a taxplanning or tax-avoidance weapon, but they pioneered a new variation. This was the use of the ‘discretionary’ trust, the idea broadly being that no-one could be taxed on it or its funds as no-one ‘owned’ anything. While it provided extra protection and security in those early days of the 20th century the driving force behind the development of the discretionary trust was the avoidance of perceived penal levels of taxation.

This set off a new game of taxation ping-pong, as Governments tried to stem perceived tax loss through antiavoidance measures, only to be confronted by lawyers and accountants devising ways around those measures etc. It will not be surprising, however, to learn that this was precisely the battle fought over the Trust between Monarchs and lawyers centuries ago, culminating in Henry VIII’s attempt to crush the Trust once and for all in 1535 by legislating it out of legal existence. This would have succeeded but for a combination of brilliant lawyers, sympathetic judges and (eventually) changing social conditions, so that the Trust reappeared (changing its

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IFC Review • 2010

name from ‘Use’ to ‘Trust’) in the 18th century as a means of controlling inheritance and the power which comes from the use of such wealth. Professionals and institutions involved in using the Trust today should pay homage to these remarkable men.

Then through the 1950s and into the 1960s, and led by the UK with rates of income tax rising to 98 per cent or even worse, advisers (finding domestic tax systems increasingly difficult to crack) turned to the offshore world as ‘new ground’ and, where the client demand went, so too did the financial institutions and the professionals to provide the facilities. (The story of the Cayman Islands and its special legislative ‘treatment’ of discretionary trusts, as formulated by Milton Grundy, is now legendary in the history of the offshore world).

The success of the discretionary Trust spread to offshore centres, and with it came the hard promotion, as Trusts brought with them considerable fees for lawyers, bankers, accountants and others from their creation and administration.

But now what used to be done quietly and confidentially was increasingly being advertised widely as a tax avoidance and asset protection tool for individuals, in many cases claiming to provide benefits which did not really fit in with Trusts as such. It was one thing for trusted family advisers to be Trustees of a family ‘discretionary’ Trust, but quite another when the Trustee was a person unacquainted with and even unknown to the person creating the Trust (the settlor) and interested only in providing these services because he or it made a (lawful) profit out of them.

Matters became even worse when the client was told (as so often he was – whatever the ‘file’ might show!) that he did not need to worry about the apparent legal width of the discretion held by this unknown person, because (privately) he could control the situation through Letters of Wishes and then through a new person called a Protector and similar devices.

By now, the Trust was being exploited and over-promoted, often by persons who knew little about Trusts (and, sadly, cared less) but thought of them as no more than a commercial or investment tool for the promoters, and exploitable as such – with little heed for the consequences.

Moreover, Trusts were being increasingly ‘sold’ as a marketing product to persons such as those newly arriving with (sometimes murky) wealth

from ‘new’ parts of the world where the Trust was unknown e.g. the former Communist States), and in other cases from countries where the Trust was (or might be regarded as) contrary to their culture. I doubt whether at most more than a handful of them understood even broadly what was this Trust thing which they were creating, and most would probably have failed even to read the overly lengthy document, couched as it was in a foreign language overlaid with archaic legal verbiage. Why read something which you did not understand but which anyway your advisers said (off the record) achieved what you wanted through your control with a Trustee who would do as you told him?

It is principally for this reason that what was once a beautiful, useful and sensible creature of the English legal system has become almost a bastardised caricature of its former self. (My comments are directed solely to the private trust, not the use of ‘public’ trust structures for public investment purposes such as unit trusts and similar public funds).

It is unsurprising, therefore, that not just States where the Trust is an alien incomprehensible creature (such as the Civil Law countries of Europe and those jurisdictions derived from them) but even those States where the Trust has been part of the legal (and social) tradition for centuries have joined hands to condemn the Trust as a tool of illegality and to wage war on those offshore centres which promote it for the use invariably of those from outside their borders. If you tweak the dragon’s tail too often and (worse) too publicly, you cannot complain at a violent reaction, and it is just bad luck that it has coincided with the failure of many Western Governments (and beyond) to manage their economies responsibly, which in turn in the instinctive reaction of failing Governments, has led them to try to divert the public gaze with headlinegrabbing graphic attacks on ‘tax havens’ and ‘tax abusive systems’, blithely ignoring that those countries would not have achieved their position but for the very failings of the attackers. But such is life!

The heyday of the Trust (particularly in its generalised offshore ‘form’) is probably over. Clients and practitioners face great hostility from those with power.

That much of this hostility is misplaced and based on misunderstanding is sadly irrelevant. The attack once made cannot be withdrawn. Like a dragonfly, the genie of the Trust may have flown and

be disappearing. Nor does it help that the latent distrust and hostility of States which ‘know not’ the Trust have been stoked by the leaders of those States which do ‘know’ the Trust and therefore should know better but choose to distort the truth for political ends. Sadly they are not over-concerned at throwing out this baby with the bath water. The UK’s manipulative Prime Minister is a prime example.

If this sounds pessimistic, it is not intended to be. Rather it is intended to inject a note of realism. Perhaps we shall see over this century what they saw over the 18th and 19th centuries, namely that the private use of the Trust will revert back to what in truth it is best suited – the proper achievement of a secure inheritance and principally for those who either through tradition live easily with the concept of a Trust or take the trouble to master its essentials through their advisers and where it can achieve properly their objectives, remembering that it is not a cure-all but an instrument, albeit of great use, with limitations. In addition, there will always be sound proper reasons at times for using a Trust outside one’s jurisdiction, particularly as people become more mobile.

Looked at in this light, those who perhaps might have been better advised anyway to look beyond a Trust may find the answers to their particular problems in other structures, perhaps of a corporate or quasi-corporate nature. In this context, it is fascinating to see the rise of the Foundation (which is a creature solely of the Civil Law system), or more accurately its availability, through local statute, outside Civil Law countries.

There may be few from non-Civil Law countries who will be attracted for legitimate reasons to what is an alien structure with alien legal concepts, but it will be interesting to see whether those from Civil Law countries, to whom the Foundation is as traditional as the Trust is alien, will have the necessary confidence that the backing legal systems of non-Civil Law jurisdictions (where the judges and the lawyers will have the same difficulties in reverse) can make Foundations there as attractive as Foundations in countries where they are as familiar to their judges and lawyers as Trusts are to those in Common Law countries. The danger is that legal concepts and approaches may spill over into, and influence, an area where juridically they have no proper place. Hence new challenges and new interests!

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IFC Review • 2010

Shari’a Trusts: Lessons from the Alhamrani Case in Jersey

by Toby Graham, Head of Contentious Trusts and Estates, Farrer & Co, London, UK

T

HIS ARTICLE LOOKS AT some

of the issues that arose in the Alhamrani litigation before the Royal Court of Jersey and seeks to draw out some lessons. The case originated from an extraordinarily acrimonious dispute between nine of the Alhamrani siblings, who had become locked in a bitter and herculean struggle to obtain control over family assets located in Saudi and in Jersey, which held the family’s foreign assets.

The two Jersey trusts were known as the Intertraders and Internine Trusts, the trustees of which were caught in the crossfire between warring family factions.

Litigation ensued in both jurisdictions, a total of 16 claims being brought in Jersey, and numerous actions being pursued in Saudi between family members. These took place in private, making it difficult to ascertain precisely what was at issue.

The Jersey proceedings raised numerous and complex issues – and led to the largest trial in Jersey history in a specially adapted venue. The recent settlement of the case has deprived those practitioners involved with Shari’a trusts of clarification of practical and legal issues that are commonly encountered.

One issue raised in the Jersey litigation was the potential mismatch between a discretionary trust – conferring wide dispositive powers on trustees and giving beneficiaries no proprietary rights – and fixed property rights conferred by Shari’a succession law. This mismatch led to suggestions that the trustees discretions were not as wide as they had previously believed. Because distributions did not accord with Shari’a shares, it was suggested that trustees were in breach of trust.

Commonly, trustees communicate with the family through a gatekeeper, in this case a family member and protector of the two trusts who had been appointed agent under a family power of attorney. It was argued that the attorney acted in breach of his duties under Saudi law, with the result that his principals were not bound by his actions. This was one area of possible overlap between the Saudi and Jersey proceedings and where the defence of the Jersey claims was impeded by the difficulties in obtaining information about the Saudi proceedings.

The first lesson, then, is that settlors need to be clear with those whom they instruct to draft trust instruments as to

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whether beneficiaries are to enjoy fixed proprietary rights or if they want the trust to take the form of a conventional discretionary trust. Unfortunately, there were drafting infelicities in the trust instruments despite Jersey trust specialists having been involved at the time of drafting. The form of the trust depends to some extent on whether the property settled onto trust was itself impressed with Shari’a shares. This was not obvious in the Alhamrani case; the property settled onto trusts was situated outside Saudi and held through companies that were ultimately owned by Cayman trusts and Liechtenstein foundations. The draftsmen, perhaps understandably, did not contemplate that Saudi property and succession principles would be relevant to such property. The case demonstrates the need for settlors to understand basic trust principles and, equally, for trustees and their advisers to have some understanding of Shari’a principles – and, if appropriate, suitable legal advice.

The Alhamrani case suggests that Shari’a shares should not be regarded as ‘sacred’ in the sense that they are immutable. They are likely to be modified in practice, usually, as in this case, to the advantage of the elder siblings at the expense of their younger (especially female) siblings. In this instance, the departure from Shari’a shares was attributed to the elder siblings’ greater contribution to the success of the family business and the fact that the eldest siblings act as family patriarchs and incur expenses for the benefit of the family as a whole.

Further, there was a family office in Saudi with a team of accountants who kept records of payments made to each heir checking they received their Shari’a share as adjusted. Their remit extended to the Jersey trusts. Thus it was eminently possible for one sibling to do better out of the trusts, but receive less from other sources, so as to ensure that they received what was due.

The only people who knew the state of the running total were the siblings who received information from the family office which were discussed at occasional family meetings. The trustees were ignorant of all this and thus could not be expected to ensure that siblings received what was due. The trustees believed – understandably – that the trusts were discretionary.

The second lesson is that Shari’a compliant investment involves well known refinements to ordinary trustee investment. This could, with careful drafting,

be accommodated within the terms of the trust. A more popular solution is to confer the power to direct trustees in relation to investments upon a trusted representative with suitable expertise, and to disapply trustees’ investment function and responsibility.

This is what the Alhamrani family did.

The Intertraders and Internine Trusts conferred powers on the protector to direct the trustees in making investments, and required the trustees to implement such directions. Directions were duly issued, and followed by the trustees. It was claimed that these directions were invalid as the trustees were on notice that the protector was acting in breach of his fiduciary duties because investments were made into trading businesses with which he was associated and which were suffering financial difficulties. The protector did not accept that his duties were fully fiduciary – pointing out that he was also a beneficiary of the trusts.

The fact that the payments were made to ailing trading businesses did not mean such duties had been breached. His explanation involved the family’s Saudi businesses – which was subject of the Saudi proceedings. The trustees denied knowledge of any breaches of duty. The case seemed some way from the paradigm of the direction to bet the whole of the trust fund on the 3.50 at Chepstow.

Thirdly, cultural, geographical and linguistic barriers can impede direct communication between beneficiaries and trustees. It is common for a gatekeeper appointed by the beneficiaries to represent them in their dealings with trustees.

In this case, one of the siblings had been appointed protector and also appointed under a family power of attorney. If the rest of the family chose not to communicate with their trustees, then it seems the trustees have little alternative other than to deal with their chosen gatekeeper.

It is the principals’ job to ensure that their agent is acting properly and is accounting for his dealings with the trustees. As mentioned, the family office in Saudi appeared to monitor the trusts and the protector/attorney claimed to report to his siblings regularly about the Jersey trusts – but some of them disputed this.

The presence of a gatekeeper does not prevent beneficiaries communicating directly with trustees, and they should certainly do this if they want trustees to take account of their needs and wishes.

Had this happened, many of the family’s problems would have been avoided.

A fourth lesson to take from this case

is that if beneficiaries disapprove of trustee actions, they should not stand idly by. On the contrary, they should speak up (if they have sufficient knowledge) or risk it being said of them that they acquiesced to the trustees’ actions.

If they believe there to be a claim, they should do something about it at the first available opportunity; there was some suggestion that the Plaintiffs might have held back for tactical reasons. If, as in the Alhamrani case, a beneficiary fails to bring proceedings in time, they will face limitation defenses.

In this case, the focus of disclosure and trial was on the state of knowledge of the family. To try to overcome limitation difficulties, the Plaintiffs here claimed that the test for knowledge to start time running was high, and required them to know that there had been a breach.

This necessitated knowledge of the terms of the trusts, the facts giving rise to the breach and that there were reasonable grounds for concluding they had a claim. The defendants argued that this was unrealistic and unprincipled. The court did not determine the relevant legal principles.

Finally, the case illustrates that litigation is not suited to resolving family disputes such as the one that flared up between members of the Alhamrani family, and which quickly escalated into noholds-barred warfare. It is difficult, even for the most experienced of judges, to manage litigation of such proportions.

The trial timetable grew and grew, and costs escalated. The real financial hazard of litigation like this is the collateral damage it can cause to structures that have been carefully crafted to preserve wealth. Confidentiality is another sure victim – this trial took place in the public spotlight and there were numerous judgments following interlocutory hearings.

In the end, litigation of this nature feeds a cycle of destructive behaviour. It focuses on the past, on blame, it seeks to find winners and losers, all of which can cause lasting damage to family relations.

Sadly, this was the case not only for the combatants, but for the wider Alhamrani family. Litigation is not good for trustees, who can find themselves drawn into family warfare only to find themselves come under fire from both sides. Cool heads, wise counsel, self - restraint and mediation might well be the better course of action if ever another such dispute arises.

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IFC Review • 2010

Dubai – Asset Holdings and Succession Issues

by Caroline Rao, Solicitor, Tax and Private Capital, Lawrence Graham LLP, London, UK

S

EEMINGLY NEVER OUT OF THE LIMELIGHT, this relatively new kid

on the block has enjoyed a rise to fame only an X Factor best of breed could hope to emulate. Dubai has often given the air of celebrity: serviced by an enviable fleet of Emirates aircraft, adorned with the finest buildings such as the Burj Dubai, and adored by numerous fans in the form of tourists and businessmen.

That’s not to say it is all fairytales (as recent events have shown) and Dubai would not be the first celebrity to learn that its fans can be fickle (rightly or wrongly). However, fans and critics alike would probably agree that whether by choice or economic circumstance, some individuals will be drawn to this young and ambitious state and others will leave.

Consequently, this article will take three different individuals and identify certain asset holding/succession options open to them.

United Kingdom (UK)-resident and English-domiciled non-Muslim individual

who has purchased Dubai real estate Unlike some other Gulf Cooperation Council (GCC) countries, real estate ownership by foreigners is permitted in certain areas in Dubai.

A UK-resident, English-domiciled individual is taxed in the UK on his worldwide income and gains and his worldwide estate suffers UK inheritance tax.

The area of inheritance/succession can be very tricky to navigate in the GCC region. As this individual is a foreigner in the United Arab Emirates (UAE), the laws of his home country, generally speaking, should apply, therefore he (being UK-resident and UK-domiciled) should be able to execute an English will to govern the succession of his directly held assets in Dubai. However, there is some argument as to whether local inheritance laws will be applied to real estate assets in Dubai, even if owned by a foreigner, so it is important to seek legal advice regarding cross-border succession.

If this individual purchased the real estate through a non-UAE holding company (and held the shares directly), he would be subject to UK income tax and capital gains of the company. An exemption is available for directors’ living accommodation benefit charge if the accommodation is outside the UK. The value of the company shares would be in his estate for inheritance tax purposes.

Upon death, although the value of the shares in the company would rebase for

capital gains tax purposes, there would be no rebasing of the property held by the company. However, this individual could execute a will to govern the shares in a holding company (depending on the situs of the holding company) without concern as to whether local inheritance laws will be applied in Dubai.

This individual could hold the property through a trust but if the value is above his available nil rate band, he will face a 20 per cent inheritance tax (IHT) charge at the date of settlement and a further 20 per cent if he dies within seven years of settlement. The trust would also be subject to 10-yearly and exit charges.

A former UK resident non-Muslim who has permanently relocated with his family to Dubai and who has a trading business, real estate and bank accounts in Dubai Traditionally, establishing and owning businesses in the GCC region has not been straightforward for foreigners, particularly as many countries have foreign ownership restrictions. Some nonGCC nationals have dealt with such restrictions in Dubai by appointing a local agent or sponsor with whom they establish the company. The local agent holds 51 per cent of the shares and the remaining 49 per cent of the shareholding is held by the non-GCC national.

A separate agreement is entered into to determine the profit/loss split. There

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are several complications with this, not least the cost of maintaining a sponsor and succession issues on the death of the local agent or sponsor. There has been suggestions that these restrictions may be relaxed in future (as in Oman where foreign ownership of up to 70 per cent of the shares in a company is permitted).

In recent years, it has been possible to establish a variety of companies and partnerships in the Free Zones in Dubai, eg Dubai International Financial Centre (DIFC) and Jebel Ali Free Zone (JAFZA). The Free Zone chosen often depends on the type of business to be conducted, as certain Free Zones are only permitted to issue certain trade licences. The location of the Free Zone is also important, as a physical presence in the relevant Zone is usually mandatory.

Such companies are attractive as the Free Zones permit 100 per cent foreign ownership, 100 per cent repatriation of capital and profits, no corporate or personal tax, and no local partner is required.

In terms of succession planning for the shares in a trading business and real estate assets for this individual, one key factor here is domicile. Has he shed his UK domicile of origin in favour of a domicile of choice in Dubai? If he has shed his UK domicile and acquired a Dubai domicile of choice as far as the UK is concerned, in what circumstances (if any) would the UAE apply Shari’a inheritance rules upon this individual’s death? That is a discussion topic in itself, but if this individual does not want to risk his UAE estate passing in accordance with the Shari’a inheritance rules, he may prefer to settle assets on trust during his lifetime. Although as a nonUK domiciled individual he can settle assets on trust without an immediate charge to UK IHT, the settlor’s capacity and the drafting of the trust structure documents should be carefully considered to ensure the structure is robust.

Certain assets should never be put into trust, including personal bank accounts. Shari’a lacks an equivalent concept of Personal Representatives in which the estate is vested upon death.

Instead, each asset of the estate is treated as passing to the Shari’a heirs in the appropriate (undivided) percentages. This includes local bank accounts. It is often prudent, therefore, to ensure that husbands and wives have their own separate local bank account (ie not in joint names) so that upon the first death, if the local bank accounts of the deceased are frozen pending determination of the

estate by a Shari’a scholar, the survivor has access to funds until such time as they can gain access to the proportion of the deceased’s assets to which they are entitled.

Should this individual choose to settle assets upon trust, he may consider a Dubai trust. In 2005, the DIFC introduced a trust law which enabled trusts to be established within the DIFC and under the exclusive jurisdiction of the DIFC Court. The DIFC claims to have a statutory and regulatory framework which has “borrowed from the best to be the best”, but it remains to be seen how the DIFC trust law will operate. It is encouraging that a number of leading English chancery barristers have been admitted to practice at the DIFC bar but this is a very new and untested trust jurisdiction and it will be interesting to see whether many new trusts will be established in the DIFC rather than in the traditional trust jurisdictions.

The DIFC has also introduced legislation governing Single Family Offices (SFOs). This individual could therefore incorporate a SFO to provide services (including investment, fiduciary, accounting, philanthropy, concierge and governance services) to one or more of his family members (bloodline descendents of a common ancestor or their spouses), a Family Fiduciary Structure (ie a trust or similar entity of which a family member is the settlor or founder), a Family Entity or a Family Business (ie certain companies controlled by the SFO). As a DIFC incorporated entity, the SFO would need to be physically present in the DIFC, but it is not regulated by Dubai Financial Services Authority (DFSA). An SFO must designate an Authorised Representative ordinarily resident in the UAE, who is responsible for compliance.

A UAE national UAE nationals are subject to local inheritance laws governed by the Shari’a courts.

Shari’a is based on the text of the Qur’an. It is not a law in the sense of a strict code, but rather a set of principles to which one must adhere. Consequently, issues governed by Shari’a can be subject to different interpretations and there are varying schools of thought as to how the principles set out in the Qur’an and Sunna should be applied.

Many UAE nationals do not make wills, because their estate automatically passes to their Qur’anic heirs in the

appropriate portions confirmed by a Shari’a scholar. However, a Muslim can leave up to a third of his estate to nonheirs upon his death.

It is also possible for a Muslim to make gifts to both Qur’anic and non-Qur’anic heirs during his lifetime, provided they are complete (absolute) gifts, and he does not make such gifts whilst suffering from an illness which ultimately causes his death. Making gifts in this way can sometimes circumvent the application of Shari’a inheritance rules upon death, and can potentially provide for the transfer of assets into a trust, foundation or waqf. Understandably, many Muslims wish to adhere to the Shari’a principles of inheritance in the same way as they adhere to wider Shari’a principles in conducting their daily lives, but often there is still good reason to settle assets into a trust or foundation structure (as indicated in the following paragraph) which can be drafted to incorporate the Shari’a inheritance principles.

There are no asset ownership restrictions for UAE nationals in Dubai and many businesses are family owned.

One practical problem with the Shari’a succession laws is that they can fragment a family business, making it difficult to manage, especially where some of the heirs have differing strategic views or personal objectives or simply have no interest in the business operation. Ultimately, this can lead to the failure of an otherwise profitable enterprise. Of course, this practical problem is not unique to Shari’a but it can be quicker to manifest itself because the class of Qur’anic heirs can be significantly larger than those in nonMuslim countries, particularly those where individuals enjoy testamentary freedom and can leave business assets to fewer individuals involved in running the family business. When looking at the structuring of a UAE family-owned business, it is important to devise a structure during the client’s lifetime which incorporates family and corporate governance to both ensure the efficient and effective continuation of the family business and to cater for each of the Qur’anic heirs’ interests.

Conclusion

The options above are not exhaustive by any means. Succession and estate planning in the UAE and wider GCC region is notoriously difficult, so professional advice should always be sought prior to any action.

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IFC Review • 2010

A New Dawn for Alternative Assets

by Ravi Bulchandani, Managing Director, Barclays Wealth

I

WROTE IN THESE PAGES LAST YEAR that rumours of the demise of

the alternative investment industry were much exaggerated. But it was a close-run thing! The average hedge fund was down between 20 per cent and 25 per cent (but it is worth remembering that this was still better than the public markets); outflows amounted to about one third of hedge fund industry assets; private equity fundraising slowed down dramatically as the valuation on existing portfolios continued to decline; and, investors didn’t want to know. It is encouraging to note that sentiment is much improved and the alternatives sector appears to have found its feet again after an extremely difficult two years. For the purposes of this article, we will focus chiefly on hedge funds and private equity.

HEDGE FUNDS Optimism Warranted

We remain optimistic about the future of the industry and, furthermore, that hindsight will show the 2009-2010 period as a great time to have added to alternative investment exposure in portfolios. The smartest institutional investors appear to be taking the same view – outflows from hedge funds have all but ceased and although large, sustained inflows remain elusive, investors are content to leave the profits earned on their hedge fund investment this year to accumulate. Many have not forgotten the reasons they got into hedge fund investments in the first place – the access to skilled managers, pursuing uncorrelated returns, using a wide range of portfolio techniques and tools unavailable to traditional managers – and all this in a structure that leads to strong alignment of interest with investors.

In looking forward, it is also worth looking back. Doubtless, some of the shock that investors felt at the fact that hedge fund investments had recorded negative returns was tempered by the fact that in aggregate the industry had actually done better than many traditional financial asset markets over that period. Perhaps, too, on sober reflection, investors realised that these were

not riskless investments, and that in an environment when any risk-taking was severely penalised, it is not surprising that hedge funds suffered.

There may also have been an element of – how shall we put this? – overstating the case on the part of many funds, and particularly funds of funds. The promise of small, positive returns every month – without significant downside – was never particularly credible, and the events of last year have cruelly exposed that fallacy.

We believe, however, that the enduring virtues of funds of funds, the fact that they provided diversification, due diligence and delegated responsibility for portfolio construction and management in an inherently complex space, will probably come back into favour again. Investors are likely to be extremely demanding for the fees that they pay and standards of scrutiny of the value that funds of funds actually add are going to be much higher.

The Balance of Power Shifts

The near-death experience of many hedge funds last year has produced a better balance between investor and fund interests across many dimensions.

In the near-term, this is leading to the availability of much better terms for al-

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ternatives investors – which they should take every effort to avail themselves of.

No longer are hedge funds or private equity firms able to impose longer lockups just because they can. There is much greater scrutiny by investors of whether the underlying asset class or strategy warrants a long lock-up. For example, if a long-short equity manager who is focused on large-cap UK stocks demands a long lock-up, investors are likely to charge for the privilege. Conversely, where a strategy demands a longer lockup (distressed debt, some credit strategies), investors are more likely to accept those if the reasons for the longer lockup are clearly stated.

Events last year are also likely to lead to greater transparency – investors will demand greater clarity on the risks that the underlying manager is taking, and much greater understanding of the precise attribution of portfolio performance. Hedge fund managers are going to need to show a greater willingness to share their entire portfolios, and investors are likely to be willing to sign up to appropriate confidentiality agreements in exchange.

This increased transparency is likely to go hand-in-hand with an increased investor focus on operational due diligence, with independent administration and custody now likely to become a minimum requirement, as opposed to a ‘nice to have’.

An increased focus on counterparty and prime broker risk is also likely, with much greater stress testing of business plans in the event of counterparty or prime brokerage failures.

Many hedge funds will also attempt to migrate some strategies to more transparent and regulated delivery structures, particularly those that can be made to conform easily to the UCITS (Undertakings for Collective Investment in Transferable Securities) format in Europe, which has so far posed few barriers to some hedge fund strategies.

Strategy Outlook

It is a well-known feature of equity markets that bear markets do not have the same life expectancy as bull markets.

Something similar appears in the hedge fund return data, although the return series is much shorter than for equity and bond markets. If this insight is true, though, we may be on the verge of a very good multi-year period for hedge fund returns. A close look at the hedge fund data supports this view – previous years

of flat or negative returns are followed by many years of strong returns. In the current environment, there are grounds for thinking that the devastating decline in hedge fund returns will be followed by some years of good returns. There are both good industry level and strategyspecific reasons for this optimism.

Reasons to be Cheerful

At an industry level, there has been a notable shrinkage of risk capital deployed in the financial markets. Many investment banks have cut back on their proprietary risk-taking activities, bank capital is being deployed to rebuild depleted balance sheets, and leverage levels are significantly lower relative to pre-crisis levels. The near 30 per cent shrinkage in the size of the hedge fund industry also means that many financial market trades that have appealing risk/reward tradeoffs are not as crowded as they once were. Accordingly, opportunities for hedge funds to deploy capital and take risk should be well rewarded. Even though some asset prices have bounced back sharply off their post-crisis lows (eg bank loans), there are still opportunities to earn high returns without deploying high levels of gearing.

Strategy Commentary

At a strategy-specific level, we think that it is likely that traditional long-short equity managers are likely to do well in the next few years. After having been driven mainly by macro and technical factors, equity markets show signs of becoming less randomly volatile, driven more by company and earnings fundamentals with greater stock-specific and sector predictability. As such, managers who are focused on primary research may well have a sustainable edge. Managers who are experts in dealing with the aftermath of recessions, such as credit-focused and distressed players, may also do well. The high spreads available for ‘event pricing’ may favour event-driven managers, although activist investing will be trickier for hedge funds in still volatile markets that will be unwilling to reward the promise of corporate performance improvement until it actually occurs.

Managers who are skilled at interpreting macroeconomic data and the impact of policy on markets will do well, and trend followers may recover their poise after a difficult 2009 when few clear trends were apparent. All in all, hedge fund managers are likely to find 2010 full of very interesting opportunities.

Private Equity

Private equity firms will find an equally interesting environment for investment – the challenge here will be that investor inflows and sentiment are unlikely to improve until there is a more sustained improvement in the availability of leverage, and greater visibility on exits by portfolio companies. Highly-leveraged buy-outs are likely to remain scarce for some time. But opportunities still exist for those who are able to deploy less leverage, as well as for operators who have added value through managerial, logistical, strategic and process improvements at portfolio companies rather than focusing merely on financial engineering. Private equity companies in this category lucky enough to have some powder dry from funds raised in late 2007 and 2008 are likely to deliver excellent returns from investments made in 2009 and 2010, although any investments made in 2006 and 2007 (when valuations were stretched and leverage plentiful) are likely to be problematic.

History is on the side of those investors bold enough to invest in private equity in 2010, as historical returns show that recessions and their immediate aftermath have proved to be an excellent time to invest in the asset class. But we believe it is going to be as important as ever to be selective in the choice of sectors, as in the choice of managers.

Two strategies that have been out of favour for a long time – secondary investing and early stage or growth investing – are likely to perform well.

Many investors are still unwilling and/ or unable to continue to meet capital calls on funds that have shown declines in portfolio values from companies hit hard by the recession, and they will be anxious to dispose of these. We believe that funds specialising in the analysis of partially-funded private equity should find plenty of value.

Finally, the intersection of a long drought in early-stage investing (the number of specialist players here has continued to decline) with the dislocations in funding created by the recession should mean an abundance of opportunities for early-stage and growth investors, particularly those that are able to tap into the wave of innovation, expertise and incredibly motivated young businesses in emerging market economies.

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IFC Review • 2010

The Alternative Investment Fund Managers’ Directive

by Peter O’Dwyer, Managing Director – Hainault Capital Limited, Dublin, Ireland, Director – The Investment Directors’ Forum Limited, Member – Irish Government Working Group on the AIFMD

“Blessed are the cheese makers” “Protectionism parading as protection”

In the wonderful movie, ‘The Life of Brian’, by Monty Python, there is a seminal scene where Jesus is preaching the beatitudes from the mountain and gets to the line, “[b]lessed are the peacemakers, for they will be called sons of God”.

A woman at the back of the crowd who can’t hear what he is saying (it was after all in the days before AV systems and PowerPoint), starts saying, “Aha. What’s so special about cheese makers?” Her husband replies, “Well obviously it’s not meant to be taken literally; it refers to any manufacturers of dairy produce.”

AIFMD

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IFC Review • 2010

I was reminded of this scene last September when the self-declared scourge of the global hedge fund industry and anti-private equity jihadist, Poul Nyrup Rasmussen, descended on the City of London to take on the heathens in their Mayfair lair.

Mr. Rasmussen, the head of the Socialist Group in the European Parliament and former trade union official and prime minister of Denmark, was in town to debate the European Union’s (EU) Alternative Investment Fund Managers’ Directive, (AIFMD), with amongst others Lord Myners, the United Kingdom (UK) Government’s City Minister. Mr. Rasmussen was in typical combative form declaring that, “[t]he Directive is mild”, that capital requirements were too modest and that the scope of the rules needed to be broadened. (Financial Times, 13.09.09) In response Douglas Shaw, the head of alternative investments at Black Rock, stated that if hedge funds were cheese, “then the EU cheese directive would tell all cheese-eaters they could only eat cheese from EU cheese makers using EU milk from EU cows fed in EU fields on EU grass.” Lord Myners went further, cautioning against provoking other countries. “We should not be beguiled by protectionism parading as protection,” he stated, as he warned against over-regulating an industry that had not caused the crisis. “Private equity and hedge funds as asset strippers, costcutters and job-flippers is an invention.”

He added that he had heard that lawyers and accountants had been involved in the crash and perhaps they also should be investigated as an object of future regulation. “In fact, I hear that 100 per cent of market failures so far have had men involved, so perhaps they need looking at.” (Financial Times, ibid) Poul Nyrup Rasmussen

Getting the debate and proposed regulation on hedge funds onto the EU agenda has been a significant and very personal coup for Mr. Rasmussen. The EU Commission, which normally proposes EU laws had, under its pro-business Commissioner for the Internal Market and Services, Charlie McCreevy, resisted these moves for over two years.

In a 2007 speech to the European Parliament, Mr McCreevy had stated, “[a]s much as some people want to demonise hedge funds, they are not the cause of the difficulties in the market.

Let us not forget where the present crisis

has its roots. Poor quality lending, compounded by securitisation of those loans in off balance sheet vehicles that few understood the risks associated with.”

(EU Commissioner McCreevy, EU Parliament 5 September 2007) Mr McCreevy also consistently made the point that alternative investment funds were already subject to rules against abusive trading and were properly monitored by national member state regulators.

Mr. Rasmussen however, was not deterred by this inaction by the Commission and, together with his Socialist Group in the Parliament, invoked a rarely used procedure to force the Commission to bring in a directive, winning the required vote in the Parliament with an impressive majority of 562-86 in September 2008.

EU Consultation Paper

The vote of the Parliament resulted in the Commission issuing a consultation paper in December 2008, with an incredibly short period for comment to 31 January 2009. The EU consultation paper was itself highly illuminating in terms of the quality of debate and understanding at this level.

In the section on systemic risk, the EU paper made the following statement, “[g]lobal hedge funds assets under management peaked at around USD2 trillion in 2007. The size of the hedge fund positions is amplified by the extensive use of leverage. According to the International Monetary Fund, average hedge fund leverage is between 1.4 and 1.7 times capital.”

It is worth considering this staggering statement in some detail. What the EU was saying is that hedge funds pose a significant systemic risk to the global economy because they are leveraged 1.4 to 1.7 times. This is at a time when investment and commercial banks from Goldman Sachs to RBS were 30 to 70 times more leveraged than that. Most ordinary trading companies are considerably more than 1.5 times borrowed, not to mention household mortgage takers, whose debt to equity ratio can be up to 20 times and beyond.

At the end of the consultation period on 29 February 2009, a conference on private equity and hedge funds was held in Brussels, where selected industry representatives were invited to meet with EU Commission representatives and parliamentarians. Those who attended from the industry side reported that the

‘consultation’ was little more than a star chamber, where the industry was harangued from a platform by officials and told that it was not a matter of if, but when strict regulation was coming.

Mr. Rassmussen was of course at the head of the Salem-style lynch party, again displaying his unique grasp of the global hedge fund industry. At the EU Conference, Mr. Rasmussen stated that, “[t]here are those who say hedge funds and private equity did not cause the crisis. But the crisis most definitely is the result of excessive debt. In a sense all credit creating vehicles including hedge funds and private equity – all of them were in the same boat (sic).” (PR Rasmussen press release 26.02.09) This is a most interesting observation. By the same logic, if a man has two legs and a woman has two legs a man is a woman and vice versa.

EU Draft Directive on Alternative Investment Fund Managers

Following the unprecedentedly rapid consultation period of seven weeks, and just eight weeks after the three hour ‘consultation conference’, the Commission felt sufficiently informed to proceed with a draft directive of some 56 articles on 30 April 2009. It was envisaged that, with a fair wind, the directive could be agreed by the end of 2009 and come into force in 2011. The highly controversial provisions relating to non-EU third countries were to have a transition period until 2014.

The timing of these initiatives comes sharply into focus when compared with other EU projects such as Undertakings for Collective Investments in Transferable Securities (UCITS) and Markets in Financial Instruments Directive (MiFID), where consultation was extensive and conducted over many years. Indeed, the elephant-like gestation of UCITS changes is such that the draft UCITS II had to be abandoned as it was already obsolete by the time it was to be implemented, so that UCITS I was in fact followed after many years by UCITS III. The draft Directive set as its objectives: • ensuring that all Alternative Investment Fund Managers (AIFM) are subject to appropriate authorisation and registration requirements; • providing for a framework for the enhanced monitoring of macroprudential risks, eg through information sharing between regulators;

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IFC Review • 2010

Total Asset Volumes by Type

USD Trillion Hedge funds 1.4 Sovereign wealth funds 3.2 Reserves ex gold 4.2 Insurance company holdings 16.0 Pension funds 17.9 Mutual funds 21.0 Stock market capitalisation 42.0 Total debt capitalisation 44.4 World GDP 45.0 (Johns Hopkins University, School of Advanced International Studies, March 2008) Reaction to the Draft AIFM Directive

Industry reaction to the draft Directive was one of complete shock and amazement. What was immediately apparent was that the stated objectives of the Directive, which in themselves were probably relatively unobjectionable, bore no relationship whatsoever to the text.

The breathtaking scope of the Directive, ie any collective investment undertaking which was not a UCITS, meant that not only were all hedge funds and private equity funds included, but also credit unions and village savings clubs. What was also fascinating was what wasn’t included, such as European credit institutions’ and insurance companies’ own product initially.

If industry figures in London, Dublin

and Luxembourg had not smelt a rat before, they certainly did now. Crossfrontier funds product was now going to be regulated out of existence and in the case of non-EU, eg Cayman product, banned altogether, (subject to a three year ‘investigation’), while German, French and Italian banks and insurance companies would be free to continue to sell their own expensive domestic product untouched by the AIFMD. In the space of this paper it is not possible to address each of the issues with the initial draft, however, it is fair to say that all 56 Articles contained problems.

These problems included, but were not limited to: • extreme problems with the limitless scope of the directive; • an inability to superimpose the definitions of players, such as ‘valuators’, or ‘depositories’ on the actual functions and roles of existing players in the industry; • the assumption that mind and management of funds rests exclusively with the AIFM, which, inter alia, has the potential to cause tax havoc as residence of funds would, under most double tax treaties, move to that of the manager with serious real tax consequences; • the lack of mention of self-managed funds and the complete ignoring of funds’ boards of directors and their significant role; • the totally confusing introduction of unworkable thresholds; • the scope for massive confusion with existing UCITS and MiFID rules and the significant costs of multiple and non-linked up compliance; • the ability of the EU Commission to bring in ‘implementation measures’ on leverage, marketing and delegation; • restrictions on the previous position regarding unrestricted ‘self-solicitation’ by professional and institutional investors, ie self-solicitation now to be regarded as ‘marketing’ and restricted; • potential inability of EU administrators to administer Cayman funds, an EUR800 billion business in Ireland; • potential inability of United States (US) and other non-EU investment managers to provide investment management services to EU funds; • potential inability of EU pension schemes and insurance companies to invest in non-EU funds, including PE funds and non-EU funds of funds; • the re-writing of the rules for European professional and qualifying

investor funds, currently governed at a national level; • the protectionist restriction of custodians, named ‘depositories’ to EU credit institutions only; and • the strict liability requirement, including for delegation of custody, by such depositories, with serious consequences for prime brokers.

In responding to the draft, the very limited number of member states with material hedge fund industries, including Ireland and the UK, faced a tactical quandary. The initial reaction was that one should simply refuse to engage on the grounds that the Directive was so unworkable that it would be better to bin it, agree on sensible objectives and start again.

However, faced by a small, determined group led by France and Germany, with a big political agenda, the imminent danger was that the ‘Club Med’ and other uninvolved member states would baulk at reading the impenetrable 56 articles of the Directive and go along with the French and Germans in being seen to clean up the bad guys of the hedge fund and private equity industries. Also under the Lisbon Treaty, the Directive will be approved by qualified majority voting, so every member state’s vote – including the uninvolved – counts.

The Position as at End of 2009

For these reasons, both the UK industry, via its industry representatives lead by the Alternative Investment Managers Association (AIMA), and the Irish industry through the joint public/private sector working group of the Department of Finance, have been very actively engaged with the Swedish EU Presidency in the period from 1 July to the end of the Swedish Presidency on 31 December 2009.

This engagement and strong representations from investors, not least the powerful intervention of both German and Dutch institutional investor groups, has resulted in a series of amendments to the Directive. The last iteration of the amended Directive issued from the Swedish Presidency on 15 December 2009. The EU Council running on the Directive will now switch to the Spanish Presidency, which assumed office on 1 January 2010.

The final Swedish draft has significantly improved the AIFMD, although there are still important problems. Articles concerning remuneration and bonuses have also been added at the last min-

AIFMD

• improvement of risk management and organisational safeguards to mitigate micro-prudential risks; • enhancing investor protection; • improving public accountability for Alternative Investment Funds (AIF) holding controlling stakes in companies; and • developing the single market for AIFM. The FAQ information issued with the draft directive also drew attention to the fact that the scope of the directive would include all funds that are not UCITS, ie if it’s not a UCITS, it’s an AIF. The FAQ also made the amazing statement that the quantum of AIFs in the EU was ‘relatively large’ at ‘around’ EUR2 trillion as at end 2008. The continued assertion by the EU regulators and Parliament that the hedge fund industry is large and systemically important needs to be confronted with the facts.

The Johns Hopkins University in Maryland, USA, attempted in 2008 to put figures on the global investment universe. These are as follows:

AIFMD

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IFC Review • 2010

ute to the Directive. Perhaps the most important relaxation has been the almost complete restoration of the status quo ante for non-EU alternative funds sold into professional and institutional investors in the EU. In this regard, the suggested position now reverts to the self-solicitation and national regulation position which pre-existed the first draft in April 2009. The most significant continuing problems, however, still remain around scope and definitions, where the Directive still attempts to define and regulate players and roles, which in practice do not exist.

The EU Parliament

As the Directive is a post-Lisbon Treaty Directive of both the EU Council and the Parliament under the so-called ‘co-decision procedure’, the role of the Parliament in the forming of the Directive is critical. Unfortunately, owing to the recent EU Parliament elections, which resulted over the summer in a change of membership and a delay in addressing the draft Directive, this is only now coming before the Parliament for discussion, notwithstanding that at a Council level, via the Swedish Presidency, it is well advanced.

In consideration of the draft Directive, the role of the Parliament’s Economic and Monetary Affairs Committee is central. In this context the appointment of Sharon Bowles as Chairwoman of the Committee, taking over from Pervenche Beres, a French socialist, is generally seen as positive. The Economic and Monetary Affairs Committee has appointed Jean-Paul Gauzès from France as the Rapporteur for the passage of the AIFMD through the Parliament.

Sharon Bowles, who is a Liberal Democrat MEP for the South East Region of England, has wasted no time in wading into the AIFMD debate. In a Financial Times (FT) interview on 29 July 2009, Ms. Bowles stated that the Directive will have to be substantially amended, not least because of the several “unintended consequences” of the current draft. She highlighted the fact that European pension funds and institutional investors face “excommunication” from global capital markets, owing to the draft Directive’s onerous restrictions on non-EU funds and fund managers.

What has been most encouraging about Ms. Bowles is her indication that she intends to get stuck into the detail.

She says that when member states look at the detail of the Directive they may

realise that they have more in common than first appears. “There is a big danger in doing big picture stuff,” she says. She has also indicated that she intends to liaise closely on the Directive with the US and has already met delegations of US congressmen.

The Rapporteur, M. Gauzès, has recently published a detailed 83 page Draft Report on the AIFMD, (COM(2009)0207) on 23 November 2009. In its review of the Report, AIMA noted that, “we agree with the Rapporteur that the right balance needs to be struck between the vitality and the creativity of this industry and proportionate regulation and supervision.” (AIMA statement 26.11.09) While most have welcomed the suggestion of M. Gauzès that alignment should be sought between the AIFMD and existing EU financial laws and regulations, there are a significant number of red herrings (such as restrictions on short selling) and other problems with this report. For nonEU centres and EU institutional and pension investors, one in particular to note is the suggestion that funds of hedge funds cannot invest more than 30 per cent of their assets in non-EU funds. As AIMA has commented, the substantial revisions suggested by both the Swedish Presidency and M. Gauzès are proof, if such was needed, that the original draft Directive is fundamentally flawed.

The Economic and Monetary Affairs Committee MEPs have until 21 January to table amendments to the draft Directive, which will be debated in committee on 22 February and put to a Committee vote on 12 April. So-called ‘trilogues’ between the Council, Commission and Parliament are scheduled for May. A vote in Parliament at plenary session is scheduled for July.

What’s It All About?

Following eight months of study of the AIFMD, most industry observers are now no wiser as to what the Directive is about and what it is attempting to achieve. At this stage, however, it would seem abundantly clear that the Directive is above all political, rather than any type of attempt at regulatory, fiscal, systemic risk or prudential reform.

Both the drafters of the Directive and its political supporters have very limited knowledge of the industry they are attempting to change in such a fun-

damental manner. In making this last statement, I speak from personal experience of having engaged with the actual draftsmen of the original directive, who demonstrate both extremely limited knowledge of the hedge fund industry and of the consequences of their actions.

Informed Commission sources have not denied that the Directive is 100 per cent a political initiative.

If this is the case, what is the political objective? In a perceptive July 2009 editorial, the FT described the Directive as like a bar room brawl, where when the fight breaks out, you punch the guy you always wanted to punch, irrespective of what the fight was about or who started it.

There is a very small number of strong supporters of this Directive, of which the most important and powerful are the French and German political and economic elite, for whom the socialist Mr. Rasmussen, almost certainly unwittingly, has proven very helpful indeed.

The Germans, it is clear, wish to smash once and for all any attempt by international venture capitalists and private equity houses to disturb the cosy and very exclusive capitalist club which has enabled Deutschland Inc. to be run by the same leading families and industrial complexes for over 100 years.

In the case of the French, I leave the explanation to Mme. Lagarde.

The (previously only slightly hidden) French political agenda, is the longterm project for Paris to take its rightful place as the centre of European finance. The ever exuberant French finance minister, Christine Lagarde, surprisingly broke cover and admitted as much on 22 July 2009.

In an FT interview, which she humbly described as a, “cri de couer against the old ways”, Ms. Lagarde stated that while she didn’t want to “talk down London...the City has lost some of its advantages during the crisis... Paris, as a financial centre stood to benefit from the enhanced reputation of its universal bank business model and from London’s tarnished image”.

Picking up on this theme, billionaire investor George Soros more recently told it like it is at a conference before Christmas at the London School of Economics. “Continental Europe would like to see London sink. The FrancoGerman alliance is the driving force.”

(Bloomberg, 10.12.09).

“Blessed are the cheese makers,” indeed!

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IFC Review • 2010

Central and South America: Geopolitics and the Burden of History

by Derek Sambrook, Managing Director, Trust Services, Panama City, Panama

I

T WAS JOSÉ MARÍA TORRES CAICEDO, a Colombian writer, who

in 1856 popularised the term ‘Latin America’ which for many readers is synonymous with the Spanish language.

Yet it is not necessarily the Spanish language that dominates the region; after all, the language of South America’s largest country and biggest economy, Brazil, is Portuguese. Brazil’s neighbour, Suriname, is a Dutch-speaking nation whose other immediate neighbours, namely Guiana (French) and Guyana (English), do not have Spanish as the official language either. It is not the United States of America alone that can claim the title of melting pot.

Even if Spanish is the official language of 18 republics in Central and South America (including the Caribbean), it is salient to remember that the region’s indigenous languages each boast millions of speakers. Quechua is common in the former Inca empire (Perú, Bolivia and Ecuador – in the latter case it is called Quichua); Guaraní is the common tongue of Paraguayans and in Guatemala and parts of southern Mexico a number of Mayan languages are spoken. Mexico alone can claim over 50 Indian languages, including Náhuatl, which was spoken by the Aztecs (more correctly called the Mexica).

The French immediately warmed to the expression ‘Latin America’ when it was first used because it distinguished the region from the United States (US) at a time when France was trying to establish its own sphere of influence. This eagerness would lead to the disastrous

attempt by Louis Napoleon to install Maximilian, a Habsburg prince, as emperor of Mexico. Brazil can relate to France’s 19th century motives and when reflecting on doctrines of American exceptionalism, one should also think of Brazil; many Brazilians don’t even feel part of Latin America. This sense of separateness and proud independence has led Brazil to believe that it is entitled to a permanent seat on the United Nations Security Council. To have been selected to host the Olympic Games in 2016 is a triumph that Brazilians will speak about for many years to come.

The North American Free Trade Agreement signed by Mexico and the US is not seen by Brazil as a unifying step for all of the Americas; quite the opposite.

Brazil prefers to encourage unity within South America itself. That is why back in 2000, when Fernando Henrique Cardoso was the Brazilian president, he hosted the first summit of South American presidents. The inspiration for this was Simón Bolívar, South America’s iconic figure of the 19th century, who fought and conquered the Spanish. Subsequently, in November 2004, when 11 South American countries (including Guyana and Suriname) met in Cusco, the former Inca capital in Perú, a South American Community of Nations was proclaimed.

The ultimate goal is to have a common passport and currency, so whether or not this European Union ideal is achieved is not the real issue: it is the stated desire for an independent identity, encouraged

by Brazil, which is significant.

Brazil is a natural driving force be-

Central and South America

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IFC Review • 2010

hind the initiative and its unique position has several strands, these quite aside from the fact that, unlike anywhere else in South America, it was a constitutional monarchy for the first seven decades after its independence. The country, as I say, is the largest on the continent and both its language and geography (the forbidding boundaries being the Amazon rainforest, the Pantanal swamps and the powerful Paraná river) serve to reinforce this isolation.

It is thought that out of approximately eight million Africans who survived the passage to the Americas, well over three million were shipped to Brazil in the four centuries to 1850 – much more, in fact, than the number shipped to the US. Slavery was not abolished until 1888 (the same year as it was in Cuba) and it was that decision, with its purest of intentions, that would lead to the end of the Brazilian monarchy.

The Awkward Squad

“No nation is fit to sit in judgement upon any other nation” – US President Thomas Woodrow Wilson’s sentiment is certainly one shared by Brazil. Reports last year caused a stir outside the country, especially in the US, after Brazil’s central bank and aides to President Luiz Inácio Lula da Silva announced that Brazil and China will move towards using their own currencies, in preference to the US dollar, in future trade transactions. There are several reasons why the greenback’s prominence should be questioned, a status that was established from the remnants of the Bretton Woods system created after the Second World War. Today the dollar isn’t fixed to gold and the US is no longer the world’s largest creditor; there are those who argue that it is an empire that can only maintain the upper hand by military, rather than economic, strength.

Consequently, Brazil’s attendance at meetings in Yekaterinburg in Russia last June, along with the leaders of the six-nation Shanghai Cooperation Organisation, an alliance which includes Russia and China, should not come as any surprise. The intention of the gathering was to discuss mutual aid which would lead to trade between the countries being conducted in their own currencies; pointedly, US officials who had wanted to attend as observers were not allowed to. The latest figures available (2007) at the time of writing show that China’s annual trade with Brazil was USD29.7 billion. In 2008, however,

China’s total trade with Latin America increased by a significant 40 per cent reaching USD143 billion.

According to Jorge G Castañeda, a former Foreign Minister of Mexico, and Stephen Haber, a professor of political science at Stanford University in the US, Latin America (despite pockets of resistance) is entering a phase of unprecedented political and economic stability which is amply illustrated by the degree of progress being made in countries such as Brazil, Chile, Costa Rica, El Salvador, Mexico, Panama, Peru and Uruguay. In varying, but nonetheless positive, degrees, these countries have pursued good macroeconomic policies that have effectively fought inflation; they have opened their markets and encouraged investment.

The result, a significant shift towards more economic opportunity, social mobility and political democracy, has gone unnoticed in some quarters. Where the countries already mentioned have broken with the past, the opposite applies in Argentina, Bolivia, Ecuador, Nicaragua and Venezuela, where they are still living in the past and have not been able, so far, to break with it. Not only that, this awkward squad of countries also fosters an elevated level of hostility towards the US. The argument goes that from the 1950s up to the election of Barack Obama, every US president since Dwight Eisenhower – other than Jimmy Carter – has interfered, in one way or another, in the domestic affairs of one or more countries in the region.

So how should one interpret last year’s coup against the Honduran president, Manuel Zelaya, who was unceremoniously removed from office last June?

Importantly, it should be understood that the Honduran coup did not originate in a military barracks but was the direct result of a court order issued by a competent judge of the country’s Supreme Court. President Zelaya, a member of the axis of ‘21st-century socialists’ headed by the president of Venezuela, warmed quickly to the idea of extending his presidential mandate, just as Hugo Chávez had done; President Chávez, however, did so only after he had held a Constituent Assembly to change the constitution.

In contrast, Mr Zelaya, whose ambitions were not shared by Parliament, the Supreme Court or even his own Liberal Party, decided to start the ball rolling by holding a referendum to test the waters.

The army refused to distribute the ballot boxes and subsequently the head of the

armed forces, General Romeo Vásquez, was sacked by the president. The resignations of the Defence Minister as well as the heads of the army, marines and air force, all duly followed. The Supreme Court had already declared the referendum illegal but the president chose to ignore this.

Perhaps if the president had not been arrested the conflict could have escalated into widespread bloody civil turmoil; that would have been terribly damaging, not just to Honduras, but to the region as a whole. By the time this article is published I would expect most of the dust to have settled and fresh presidential elections to be in planning or completed. In my opinion, it is not taking sides to say that the coup is hardly a return to the 1980s with its spate of civil wars across Central America. Just as the US Supreme Court determined the fate of a presidency in December 2000, arising, in part, from considerations of judicial power, so the gavel, and not the grenade, was used in Honduras to defend that country’s constitution.

Geopolitics in Central America and the northern Andes point to Panama – where presidential elections in the middle of last year proceeded, as they have done for almost 20 years, without incident – as Washington’s new Central American listening post. Ironically, Panama replaces Honduras which, back in the 1980s, had played this role during the civil wars in El Salvador, Nicaragua and Guatemala. Certainly, relations between Panama and the US on all levels have improved since Theodore Roosevelt requested a legal justification for his acquisition of the canal in Panama from his Attorney General, Philander C Knox. “Oh, Mr. President”, came the response, “do not let so great an achievement suffer from any taint of legality”.

It would appear that in Panama, resentment has been replaced by reality which, sadly, is not the case in those few Latin American countries still locked in the past. Panama’s regional political prominence, as well as its infrastructure (the most developed in Central America), suggests that its regional banking centre will continue to develop. Although its government is reluctant to dilute the country’s prized banking secrecy, Panama will not choose the path of isolationism and risk becoming known as the North Korea of offshore banking. Above all else, as with their canal, reality will always trump resentment for Panamanians.

The Jurisdictions

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Antigua

IFC Review • 2010

Antigua: a Caribbean Centre for Commerce

by Brian Stuart-Young, Chairman & CEO, Global Bank of Commerce, Ltd., Antigua, W.I.

A

NTIGUA AND BARBUDA, a

favourite destination in the Eastern Caribbean for both tourism and international financial services, is not unscathed by the current economic downturn being experienced in the world’s major financial centres.

Whilst it is generally true that when the major developed world markets sneeze, the small island economies in the Caribbean catch a cold, there are peculiar circumstances to this financial crisis that largely point to concerns over the standards for banking regulations, audit inspections and business rating services that operate specifically in those major world markets. The impact on the global economy is changing the way large financial institutions must operate, and is opening doors for banks located in small jurisdictions that have had nil impact from the toxic sub-prime mortgage debt to support financial market integration.

Antigua and Barbuda has the infrastructure to respond to the special business needs and financial services not only of the Caribbean, but of an international clientele.

A Regulatory Environment for Investment

The jurisdiction has a robust mutual legal regime which facilitates a transparent process under which information may be exchanged. It will not allow itself or its banks to be used as a secret tax haven and recognises the requirements for tax compliance and anti-tax fraud policies. It was one of the first Caribbean jurisdictions to establish a tax information exchange agreement (TIEA) with the United States (US), and has held tax treaties with the United Kingdom (UK) and the Caribbean Commonwealth Community for many years. It

fully anticipates the successful completion of more than a dozen TIEAS by the last quarter of 2009, which would make it fully tax compliant with the requirements of the Organisation for Economic Cooperation and Development (OECD). Mutual legal assistance in anti-money laundering (AML) and financing of terrorism matters is also provided for under the Mutual Assistance in Criminal Matters Act (MACMA). The MACMA provides for mutual assistance for all countries that are members of the British Commonwealth, the US and for other countries for which Antigua and Barbuda has signed mutual legal assistance treaties (MLATs). There is no legal or practical impediment for rendering assistance where both countries criminalise the underlying offence. The jurisdiction also benefits from being a member of the Egmont Group through Antigua’s supervisory authority, the Office of National Drug and Money Laundering Control Policy (ONDCP), which assists communications between Financial Intelligence Units to prevent money laundering and the financing of terrorism.

Banking Supervision

The regulatory environment of banks providing international financial services is strongly supervised for the safe and ethical deposit of foreign currencies and the delivery of wealth management solutions. The jurisdiction undergoes regular peer evaluation by the Caribbean Financial Action Task Force (CATCF) as well as reviews by the World Bank and the International Monetary Fund (IMF), all of which satisfy the enhanced

scrutiny given to international banking.

Banks are licensed and regulated by the Financial Services Regulatory Commission and must maintain internal policies to govern compliance with international standards. These requirements include annual thirdparty audits of their AML and antiterrorist financing (ATF) practices and must be submitted to the ONDCP and the Commission for review. The banks are dependent on good correspondent banking relationships located in major financial centres and are therefore also subject to the host country’s sovereign rule and policies.

In October, 2009, the Caribbean Association of Indigenous Banks launched a code of standards, known as the Caribbean AML/CTF Principles, which will assist its member banks in the region to support the integrity of their correspondent relations. Annual financial audits are mandatory and are conducted by resident offices of well recognised firms including PriceWaterhouseCoopers, PKF and KPMG. Business Centre

The combination of well-regulated financial services, world class communications, an English-speaking and skilled workforce and strong professional resources offers a positive environment for electronic and international business services. Antigua provides ideal support for information technology services and internet-driven business opportunities that demand more sophisticated financial services.

The Antigua and Barbuda Investment Authority established by the government assists the investment process and identifies related incentives for certain investment categories. Modern financial www.ifcreview.com/Antigua

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Wealth Management

Antigua has become attractive to

international investors seeking private banking services and wishing to balance their portfolios with strong fixed income returns and foreign exchange trading, and who are interested in property investment in the jurisdiction.

Increasingly, investors have been purchasing properties in Antigua and Barbuda as vacation and second homes.

These investments also qualify them for Permanent Residency, and they can obtain advice from any of the major local accounting firms such as PriceWaterhouseCoopers, PKF, KPMG or their own advisory resources for tax planning arrangements. Several major real estate developments are being undertaken in Antigua and Barbuda, and interest from international investors has been significant. The international banks have been supportive to investors pursuing local real estate and tourism projects.

Global Communications

Business persons who demand efficient international banking will appreciate the services offered in Antigua.

Internet banking provides 24/7 access to view account activity, establishes bill-payments and standing orders

and initiates wire transfers and other necessary communications to the bank. To further assist and maintain financial control over accounts, related card products linked to customer accounts that permit access to funds around the world at banks, merchants and ATMs are available. Strong and secure communications defy geographic constraints by putting the bank branch in your backyard and full banking services at your fingertips.

Antigua’s International Financial Centre

Antigua’s International Financial Centre is committed to meeting the requirements of modern business and is well regarded in the surge of global demand for financial solutions for international business, wealth management and e-commerce services. It is redefining the role of international banking relationships and complimenting global business opportunities that need financial solutions. The combination of well-regulated financial service providers and the ability to offer modern financial services in a stable environment makes Antigua and Barbuda a premier location for doing global business.

Keep up to date every month with all new articles and more by registering for the IFC Review monthly e-journal. Simply email subscriptions@ifcreview.com with the subject ‘ej’

www.ifcreview.com/Antigua

Antigua

services include internet banking, telephone banking, wire transfers in major currencies, corporate and trust administration, pension and fund management, payroll services, electronic commerce facilities that allow online sales of international services and products and the development of multi-functional stored value debit cards. These are powerful financial tools that enable business people to compete in an international and open market environment.

The remarkable growth of the internet is impacting economies around the world, and Antigua is no exception.

As an independent nation, it is well positioned to attract international business for electronic commerce. The government has passed the relevant legislation to govern e-commerce, the Electronic Transactions Act, and also to control abuse of electronic systems and protect the safety of online activity.

The government is also committed to operate as an e-government and has positioned Antigua to become a leading Caribbean IT centre.

Global Bank of Commerce provides the perfect balance of world class banking services, security and convenience.

We have over 25 years of experience managing your wealth across the globe, generation by generation.

Let our strong foundation support your financial goals, today and tomorrow.

Personal Banking Wealth Management Global Commerce Centre Old Parham Road P.O. Box W1803 St. John’s, Antigua, West Indies Tel: (268) 480-2240 Fax: (268) 462-1831 email: customer.service@gbc.ag website: www.globalbank.ag

Online Banking Electronic Commerce Solutions Global Remittance Services Global Banking Solutions

55

IFC Review • 2010

GENERAL OVERVIEW

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Antigua and Barbuda, West Indies.

Eastern Standard Time.

App. 70,000.

St John’s.

VC Bird International Airport.

English.

Eastern Caribbean dollar (EC$); US$ is widely accepted.

Democratic monarchy. +268.

Common law.

Tourism, financial services, banking/accounting/legal, IT services.

TAX

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

10-25%.

0% for international business corporations.

None.

For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies Minimum authorised capital Minimum share issue

USD, GBP, EURO, CAD. No minimum except for licensed companies.

None.

TYPE OF ENTITY

Shelf companies Timescale for new entities Incorporation fees Annual fees

Not common.

0ne-two days (licensed companies at least one month).

US$300 plus Registered Agent Fees.

US$300 plus Registered Agent Fees.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

One. None except for licensed companies.

Yes except for licensed companies.

Annual.

SHAREHOLDERS

Disclosure

Bearer shares

Minimum number

Public share registry

Meetings/frequency

To registered agent and also to Financial Services Regulatory Commission for licensed companies.

Yes, provided beneficial ownership is recorded with registered agent and updated.

One. No, but may be registered by registered agent.

Annual.

ACCOUNTS

Annual return Audit requirements

No, except for licensed companies.

Licensed companies.

OTHER

Registered office

Domicile issues

Company naming restrictions

www.ifcreview.com/Antigua

Must be in Antigua.

Import and export option available.

Must include ‘limited’, ‘corporation’, ‘incorporated’ or the corresponding abbreviations or the foreign equivalent.

Antigua

Antigua - Fact File

Austria

56

IFC Review • 2010

The New Austrian Holding Regime: Now Better Than Ever

by Erich Baier, MBA, LL.M (International Tax Law), Certified Tax Advisor, Austria

Introduction

For more than 20 years, Austria has been one of the leading jurisdictions in regard of Holding Companies. Apart from tax aspects, which will be described below, the following criteria make Austria a perfect location for establishing a holding company: • member of the European Union (EU) since 1995; • various United Nations (UN) organisations have their headquarters in Vienna; • Austria is located right in the centre of Europe; • stable and growing economy; • unrivalled security and health care system; and • clean and healthy environment.

Apart from these facts, Austria offers the

following tax benefits: • no net wealth tax; • no gift and inheritance tax (as from 1 August 2008); • extremely friendly tax climate; • large tax treaty network (more than 80 treaties); • written tax rulings can be obtained on a no-name basis; • large number of tax incentives both for corporations and individuals; • liberal, open-minded tax authorities with a high level of education; and • willingness to cooperate.

Austria is famous for its neutrality and its perfect relationships with its international partners. This is one of the reasons why Austria has a tax treaty network with more than 80 countries worldwide. www.ifcreview.com/Austria

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IFC Review • 2010

It is a long-standing tradition that Austrian entrepreneurs and Austrian companies are free-thinking in their decisions on how to finance their businesses. The Austrian Supreme Court holds that it is up to an entrepreneur how to finance their business and it would violate constitutional law in Austria if that right was restricted. Therefore, Austrian tax law does not know any debt-equity ratios or thin-cap rules. Any interest payment is fully tax deductible regardless of whether it is paid to a domestic or foreign lender.

• no withholding tax is withheld even if interest is paid to a lender in a non-treaty country • no CFC legislation Dividends from foreign subsidiaries and capital gains from the sale of shares in such subsidiaries are tax exempt and there is no treaty necessary with the relevant country in which the subsidiary has its seat to obtain that income taxfree, even if the subsidiary is tax exempt according to local regulations or if the subsidiary has its seat in an off-shore jurisdiction.

Any Austrian corporate entity, such as a GmbH (company with limited liability) or an AG (stock corporation), can obtain tax exempt dividends and tax exempt capital gains. There is no need for a special purpose vehicle. Losses of foreign subsidiaries, calculated according to Austrian rules, are deductible from the Austrian parent’s tax base.

KEY FEATURES OF THE AUSTRIAN HOLDING COMPANY Domestic Holdings

In Austria, inter-company dividends are tax exempt in the hands of the receiving company. There is no minimum shareholding requirement and there is no holding period required to obtain such dividends tax exempt. Capital gains resulting from the sale of shares in a domestic corporation achieved by another corporation are taxable and are exposed to the statutory flat corporate tax rate of 25 per cent. Provided that the acquisition of the shares of the underlying subsidiary was leveraged, any interest either paid or accrued until such capital gains were achieved are deductible from such a capital gain.

Foreign Holdings

To obtain tax exempt dividends and tax exempt capital gains from international participations, a minimum shareholding www.ifcreview.com/Austria

of 10 per cent and a minimum holding period of one year is required. Provided that these conditions are met the Austrian Holding Company can obtain tax-free dividends and tax-free capital gains regardless of whether Austria has a treaty with that foreign country or not.

tax rate is significantly reduced and is in most cases between five and 10 per cent. By using domestic regulations laid down in Austrian tax law, royalty income routed via an Austrian company can lead to a profit exposed to a tax bracket of only four to eight per cent.

Indirect Holdings

Foreign Subsidiary Achieves Passive Income

According to Austrian law, indirect participations via partnerships lead to tax exempt income for the Austrian holding company.

Hybrid Structures

It is also possible to use Austrian corporations for hybrid structures.

The tax exemption for income does not only include dividends and capital gains, but also any type of profit-related income an Austrian corporation achieves from either domestic or foreign source income. If an Austrian company does not have a direct shareholding in a foreign entity but grants a loan to that foreign entity, the interest paid to the Austrian company is tax exempt and seen as a kind of dividend income, provided that the interest is profit-related and that the Austrian company is entitled to participate in the liquidation proceeds of the foreign entity. That does not mean that there will be liquidation proceeds, but that the corporation has to have the right to participate. Even if the foreign entity deducts these payments made to the Austrian corporation from its own tax base, these payments stay tax-free in the hands of the Austrian company.

Ruling

Such a hybrid structure can be implemented, as can other such cases, with the help of the Austrian tax authorities from which written rulings can be obtained.

Dual Resident Companies

These companies have access to the Austrian holding system provided that the management of the foreign parent company is in Austria.

Obtaining Royalty Income via Austrian Companies

Austrian companies are quite often used to obtain royalty income from foreign sources. Among Austria’s large number of tax treaties, 34 provide for a zero withholding tax rate levied upon royalty payments to or from Austrian companies, including the UK and the United States (US). For many more, the withholding

The scope of passive income is very narrow according to Austrian regulations.

For Austrian tax purposes, a foreign subsidiary achieves passive income only if it achieves the following income: • interest income; • royalty income; • capital gains resulting from the sale of less than 10 per cent shareholdings in other corporations.

Rental income achieved by a foreign subsidiary is always seen as active income.

Trading assets or securities is considered active income for Austrian tax purposes.

Tax Consequences in Case of Passive Income

Provided that the subsidiary achieves passive income and the overall tax burden of the subsidiary is not more than 15 per cent, any dividends distributed by the foreign subsidiary or any capital gains resulting from the sale of shares of such a foreign subsidiary are taxable in the hands of the Austrian company.

Provided that the foreign subsidiary achieves passive income and the overall tax burden of the foreign subsidiary is not more than 15 per cent, there will be no CFC legislation. The mere holding of such subsidiaries does not trigger any taxes in Austria.

New Improvements in the Austrian Holding Regime

Contrary to the regulations applicable to domestic holdings, foreign holdings require a minimum of 10 per cent shareholding for a period of at least one year to obtain tax-exempt foreign source dividends and capital gains. Austria just recently amended the Austrian Corporate Income Tax Act so that shareholdings of less than 10 per cent in companies which have their seat within the EU or the European Economic Area (EEA) lead to tax exempt dividends whereby certain conditions, as laid down below, have to be met.

Active business / Local tax 15 per cent or more Provided that the subsidiary with its seat within the EU/EEA is conducting an

Austria

General Tax Regulations

Austria

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IFC Review • 2010

active business and the local tax is 15 per cent or more, dividends received from such a subsidiary are tax exempt in the hands of the Austrian company, whereby no minimum shareholding is required.

Provided that the shareholding in such a subsidiary within the EU/EEA is less than 10 per cent, capital gains resulting from the sale of the shares are taxable but a foreign tax credit will be granted; if its shareholding is 10 per cent or more, the capital gains are tax exempt.

Active business / Local tax less than 15 per cent The dividends received from a subsidiary with its seat within the EU or the EEA will be taxable and a foreign tax credit will be granted. Capital gains will be tax exempt if the shareholding in such a subsidiary with its seat in the EU or EEA is 10 per cent or more.

No More Withholding Tax on Outgoing Dividends

The new regulations which came into force also foresee that a corporate shareholder with its seat within the EU/EEA can file for reimbursement of withholding tax levied upon dividends from Austrian sources which could not be credited totally or partially against domestic income taxes in the country of residence of the corporate shareholder provided that the tax treaty Austria has with the relevant country includes a clause foreseeing comprehensive administrative cooperation and support in enforcement.

The taxpayer has to give written proof that the Austrian withholding tax was not credited against the domestic tax.

Such proof can include, inter alia, a copy of the tax assessment note.

Group Taxation

Apart from these magnificent conditions for Holding Companies in Austria, Austrian tax law offers the world’s best Group Taxation System. This group taxation system enables Austrian companies to offset not only losses which were suffered by their domestic subsidiaries from its own tax base, but losses of their foreign subsidiaries. This tax tool leads to material tax savings and unrivalled tax planning opportunities.

The conditions for applying this Group Taxation System are: • a shareholding of more than 50 per cent in the (domestic or foreign) subsidiary; • a majority of voting rights; and • the group member has to stay within the group for at least three years.

The Austrian parent company which wants to integrate its subsidiaries into a group has to file a petition for group taxation with the competent tax authority, which is purely a formal act.

What are the consequences of forming a group?

No more taxes at the level of domestic subsidiaries. In regard to domestic subsidiaries integrated into a group, no more taxes are levied upon the income of the subsidiary. Profits achieved by a domestic group member are allocated to the parent company which then has to include the profit of the subsidiary into its own tax base. Losses suffered by the domestic subsidiary can be offset from the tax base of the group parent company.

In the case of domestic subsidiaries integrated into a group, 100 per cent of the profit or loss of the subsidiary is allocated to the parent company, irrespective of the percentage of shareholding the parent company has in its subsidiary.

Example 1

Company A holds 52 per cent in a domestic subsidiary, but 100 per cent of all profits or losses are allocated to the group parent. In case of foreign group members suffering from a loss, only the percentage equivalent to the shareholding in that foreign subsidiary is allocated to the group parent in Austria for tax purposes.

Example 2

Company A holds 52 per cent in a foreign subsidiary, therefore 52 per cent of the losses can be set off from the Austrian tax base. Profits achieved by the foreign subsidiary are tax exempt in Austria.

Amortisation of Acquired Shares of a Group Member

50 per cent of the acquisition price of the shares paid for a domestic subsidiary can be amortised over a period of 15 years and is fully tax deductible for the Austrian parent company. This fantastic regulation laid down in the Austrian Corporate Income Tax Act now makes a share deal equal to an asset deal and leads to almost unlimited tax saving possibilities.

Summary of the Austrian Holding System

• domestic dividends: tax exempt; • domestic capital gains: taxable (25 per cent);

• foreign dividends and foreign capital gains: tax exempt (10 per cent holding for at least one year); • no tax treaty required: dividends from foreign corporations and capital gains resulting from the sale of shares in such foreign corporations are tax exempt, regardless of whether a treaty with this country is existing or not.

• no CFC legislation: only dividends received from foreign companies earning interest income or royalties are taxable, as are capital gains resulting from the sale of shares in such companies. The mere holding of shares in such companies does not trigger taxes. Any other dividends or capital gains, even from offshore companies, are tax exempt; • no debt-equity rules: interest fully deductible, even if effectively connected with tax exempt income; • no withholding tax on interest paid to foreign lenders (eg offshore company) • notional interest deduction: for a foreign shareholder’s loan, notional interest can be deducted for tax purposes thereby reducing the tax base; • losses of foreign subsidiaries tax deductible in Austria (Group taxation): losses of a foreign subsidiary can be offset from the tax base of the Austrian parent company (condition: shareholding of more than 50 per cent in the foreign subsidiary); • ‘Check-the-box’ system: Austrian parent companies can decide for each holding in a foreign subsidiary whether capital gains resulting from the sale of such shareholdings shall be tax exempt (as foreseen by law) or be taxable; and • dual-resident companies can use the Austrian holding system.

Conclusion

The extreme tax benefits and the very liberal approach of the Austrian tax administration, together with a large treaty network, makes an Austrian Holding a perfect tool for holding shares in domestic and foreign corporations. The lure of offshore income tax-free, optimal international financing structures, royalty income with an average tax burden of less than eight per cent and the utilisation of foreign source losses to compensate other taxable income and to avoid capital gains tax should prove very attractive to the astute investor. www.ifcreview.com/Austria

59

Austria - Fact File GENERAL OVERVIEW

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Central Europe.

Greenwich Mean Time +1.

8,200,000.

Vienna.

Vienna, Linz, Salzburg, Graz, Klagenfurt, Innsbruck.

German.

Euro.

Republic. +43.

Civil law.

Tourism, high-tech, biotech, financial services.

TAX

Personal income tax

Corporate income tax

Exchange restrictions

Tax information exchange agreements

Progressive tax rate (up to 50% when tax base exceeds 51,000) numerous exemptions and tax incentives.

Flat 25%, capital gains (cross-border) and inter company dividends (domestic and foreign) tax exempt, far-reaching group taxation system (domestic and foreign losses of sub´s tax deductible).

None.

For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies

Minimum authorised capital

Minimum share issue

No restrictions.

GmbH (company with limited liability) €35,000. AG (stock corporation) €70,000.

Private foundation €70,000.

One (AG , GmbH). Foundation has no shares, only beneficiaries.

TYPE OF ENTITY

Shelf companies

Timescale for new entities

Incorporation fees

Annual fees

Hardly available.

One week.

Articles of Association €2,500–€4,000. Notary €1,500–€3,000. Registration fees app. €400. Capital duty 1% of paid in share capital.

Minimum corporate tax €1,750 credited against later corporate tax, can be carried forward for indefinite time.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

One. No. No. As required / discretionary.

SHAREHOLDERS

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Yes. No. One. Yes. As required / discretionary resolutions can be on mail basis.

ACCOUNTS

Annual return

Audit requirements

Obligatory for both trade law and tax law purposes.

AG (stock corporation) and foundations: obligatory. GmbH: depending on size, obligatory if: employees are more than 250, asset´s value is more than €12.5m and turnover is more than €25m in two consecutive years.

OTHER

Registered office

Domicile issues

Company naming restrictions

www.ifcreview.com/Austria

Required.

N/A. Only necessary that the name of a company has to be clear and distinctive, it is NOT necessary anymore that the purpose of the company is reflected in its name.

Austria

60

The Bahamas

IFC Review • 2010

The Bahamas Financial Services Industry Wendy Warren, CEO and Executive Director, Bahamas Financial Services Board, Bahamas

Looking Forward

The Bahamas continues to focus on being a high quality destination for owners of capital. This focus is captured in the shared vision of the government and private sector for the way forward: “To be a globally competitive international business centre for wealth management, capital investment in the Americas and emerging markets, and residency”.

This vision brings to bear the unique strengths of The Bahamas: • our history as a trusted partner for the international business community and families worldwide, due in large part to the outstanding record of political stability, progress and stewardship, status as an independent territory providing an efficient basis of common law, and the longstanding commitment and continuity of its people and government to the industry and its clients ; • our ideal location at the crossroads of the Americas in a time zone that is convenient for most of the major centres in the Americas; and • our physical resources of land, premises and fit-for-purpose infrastructure all located in one of the most idyllic settings in the world.

The Bahamas is not resting on its laurels by relying solely on these core assets; rather, it is working towards improving the value proposition of the country. From the implementation of modern insurance legislation and regulations and a new Arbitration Act, to the modernisation of infrastructure including the construction of the new Lynden Pindling International Airport in New Providence, scheduled for completion in 2011, many critical steps are underway.

G20/OECD Standard of Transparency and Tax Information Exchange

The transformation of the global economy has not left The Bahamas’ international financial services industry unchanged. With 10 tax information exchange agreements (TIEAs) under its belt, and 13 additional agreements initialed, The Bahamas intends to meet the OECD standard well in advance of the G20 deadline of March 2010. The decision to endorse the OECD standard reinforces The Bahamas’ unwavering commitment to be a trusted jurisdiction for clients, and to be a responsible member of the international community.

The Bahamas remains strongly committed to the principle that persons have a right to privacy with respect to the conduct of their affairs. Moreover, respect for the rule of law always has been fundamental to the success and strength of the financial services industry in The Bahamas. As such, clients can be assured that The Bahamas will only exchange information on agreed and transparent protocols. All of the agreements signed

by The Bahamas are in accordance with the OECD Model TIEA and Double Taxation Agreement. As such, the basis on which The Bahamas will cooperate with countries is the same as all countries that adopt Article 26. In particular, through the agreements, The Bahamas commits to cooperate only upon requests where specific information is provided. This requirement for specific information is critical in furtherance of The Bahamas’ stated position to prevent so called ‘fishing expeditions’.

In the 2002 Bahamas-United States (US) TIEA similar arrangements which limit the exchange of information to

specific requests that meet predefined criteria were agreed. These arrangements, which have been in place over the last six years, have been respected by the US and The Bahamas. Likewise, legislation that gave effect to The Bahamas-US TIEA continued to preserve client confidentiality by denying any request; • that is outside of agreed arrangements and procedures; • where insufficient evidence is provided to support the request for information, so called ‘fishing expeditions’; or • where conditions are not agreed for stipulated safeguards of the information.

The Bahamas Financial Services Board expects the enabling legislation for the new TIEAs will provide the same safeguards. These arrangements will allow The Bahamas’ international financial sector to continue to develop in an environment that adheres to internationally agreed standards.

Over a decade ago, the OECD sought to have The Bahamas implement its standard for transparency and tax cooperation. The Bahamas’ response to the OECD standard was to insist that all countries implement the same standard at the same time as The Bahamas.

Notwithstanding significant changes in the world of finance, The Bahamas continues to fulfill its commitment to clients and the OECD, as the OECD standard is being implemented in all major countries providing financial services to a global clientele.

A Wealth Management Centre

The Bahamas’ strength is rooted in its long history in providing financial services since the 1930s, and reinforced by the jurisdiction’s ongoing commitment to maintain and grow its presence as a www.ifcreview.com/Bahamas

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IFC Review • 2010

Established

Its established role and expertise in private banking and trust services also has given birth to a comprehensive and compelling array of financial services that includes private banking, estate planning, asset management and fund administration services. The Bahamas also provides services to the international capital markets, and to the insurance and maritime industries.

Corporate registry and legal and accounting services are at the core of the multitude of services available in The Bahamas.

The integrity and continuity offered by institutions located in The Bahamas provide a secure environment. With personnel committed to the local community, continuity of service is more predictable and stable in The Bahamas and is the basis of its many longstanding institutional and client relationships. The Bahamas’ long tenure in financial services also has created a growing storehouse of skills and experience that is trusted by the international financial community.

The top four global accounting firms operate from The Bahamas and there is a large pool of lawyers trained in English common law. And, its English speaking society easily facilitates its integration into the global business community.

Progressive

The jurisdiction continues to demonstrate foresight through responsive, progressive developments to meet the requirements of an increasingly sophisticated financial services marketplace.

Providing specific legislation addressing the manner in which Private Trust Companies (PTCs) may be established and operated in The Bahamas is an example of the jurisdiction’s responsiveness and rounds out a series of steps undertaken in recent years to respond, in a comprehensive and competitive manner, to the estate planning needs of clients.

The SMART fund is another example, based on the recognition that a one-size fits-all-solution is not suitable for many clients. SMART Funds provide an excellent tool for families which utilise www.ifcreview.com/Bahamas

trusts, foundations or family offices to access the alternative investment world.

These legislative initiatives, along with the Foundations Act, Purpose Trust Act and the amendment to the Perpetuities Act, have solidified the country’s wealth-management services.

Welcoming

The Bahamas is not only home to more than 250 banks and trust companies which enjoy long-standing relationships with clients from around the world.

In recent years, as more and more individuals have chosen to ‘follow their money’ with respect to where they live and work, The Bahamas also has become the preferred choice for many who have adopted this way of life.

With a streamlined application process for Economic Permanent Residency (EPR), the ability for individuals to work and live in The Bahamas has become even easier and more attractive. A predictable and user-friendly EPR application process, combined with the country’s physical resources and infrastructure, enhances the Bahamas’ environment as a location for individuals and Family Offices as well as for more institutions to consider the establishment of subsidiary operations in the country.

It should be noted that Government maintains a flexible immigration policy which recognises that national development objectives can be pursued through a policy suited to the needs of international firms, individuals and families.

Permanent Residency, for example, allows the holder to pass freely through immigration and to remain in The Bahamas for the number of days the holder desires. The norm is that spouses and children may be endorsed on the permit for a one-time government fee.

Persons with permanent residence are for all intents and purposes treated like Bahamians except for the right to vote.

Annual residency and a residency card are also available and do not require an investment in the country.

The existing investment threshold for economic permanent residence is USD500,000 on a residence. Permanent Residency with the right to work in one’s own business is often afforded to the owners of capital who simply want to manage investments, whether through a family office or their home office, or to manage their business based in The Bahamas. This status means an individual automatically qualifies for

the right to work in The Bahamas.

A Well-Regulated Jurisdiction

Regulation in The Bahamas has also served the industry well. Policy makers and regulators are committed to open and ongoing dialogue with the private sector. This has created an environment designed to encourage the continued growth of the sector through adherence to internationally accepted regulatory principles, and efficiency in their administration.

Since the banking industry itself is the cornerstone of the country’s financial services industry, the Central Bank of The Bahamas plays a lead role among the country’s regulatory agencies and enjoys full autonomy.

Its stature within The Bahamas is reinforced by its longstanding presence in the jurisdiction; the Central Bank, in fact, has been regulating banks and trust companies in The Bahamas since 1965. The Central Bank along with the Securities Commission of The Bahamas and the Insurance Commission adhere to the standards established by the relevant international agencies and participate actively, as opportunities are presented, within these agencies. For example, the Securities Commission became a full member of the International Organisation of Securities Commissions (IOSCO) within months of being established in 1995.

This philosophy of operating in a globally integrated market for financial services saw The Bahamas lead the way in criminalising money laundering in 1996; and it has continued to give keen attention to this area to ensure the country’s counter-money laundering legislation is continually advanced to meet global best practices and standards.

The Way Forward

The year ahead certainly will be one of transition as the global economy and the financial services industry adjusts to the new paradigm. Nonetheless, arising from its long-standing investment in people, policies and the environment, The Bahamas will continue to be a leader in financial services and domiciliation/residency. It will ensure that favourable attributes for locating and servicing operational subsidiaries and assets of corporate entities wishing to undertake business or make private capital investment in the Americas are fully explored and understood by the owners of capital.

The Bahamas

provider of high quality financial services.

This historic involvement has created a jurisdiction that can easily be defined as established, progressive and welcoming for financial services and residency.

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IFC Review • 2010

The Bahamas

The Bahamas - Fact File GENERAL OVERVIEW

Location

Time zone

Population

Capital

Airport(s)

Language

Currency

Political system

International dialling code

Legal system

Centre’s expertise

Archipelago of islands in Atlantic Ocean, 80 km off the southeast coast of Florida.

Eastern Daylight Time /Eastern Standard Time.

304,000.

Nassau, New Providence.

Main: Sir Lynden Pindling International Airport (Nassau).

English.

Bahamas.

Constitutional parliamentary democracy; bi-cameral legislature. +242.

Based on English common law.

Leader in private wealth management (PWM) services; banking and trust, investment funds, securities advisory, corporate services.

TAX

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

No. No. Resident: some.

For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies Minimum authorised capital Minimum share issue

No restrictions.

IBC: No minimum capital required.

None. (In practice one).

TYPE OF ENTITY

Shelf companies

Timescale for new entities

Incorporation fees

Annual fees

Yes. Within 24 hours subject to name availability and reservation.

IBC: US$500 to US$1,500.

IBC with authorised capital of US$0 to US$50,000 – US$350. IBC with authorised capital of US$50,001 and over – US$1,000.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

IBC: one.

A director/ secretary need not be resident.

Yes. Discretionary.

SHAREHOLDERS

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Register of directors and officers.

Not allowed.

IBC: a minimum of one shareholder.

No. IBCs: AGMs are not required but can be held anywhere or by telephone.

Annual return Audit requirements

IBC: no.

None, unless required by the IBC’s Articles of Association.

ACCOUNTS

OTHER

Registered office

Domicile issues

Company naming restrictions

Yes. An IBC is also required to appoint a registered agent in The Bahamas.

Change of domicile permitted.

IBC Prohibited Names: ‘assurance’, ‘bank’, ‘building society’, ‘chamber of commerce’, ‘chartered’, ‘cooperative’, ‘imperial’, ‘municipal’, ‘royal’, ‘trust’, etc.

Names must end with an appropriate suffix such as ‘incorporated’, ‘limited’, ‘corporation’, ‘gesellschaft mit beschrankkter haftung’, ‘sociedad anonima’ or respective abbreviations. www.ifcreview.com/Bahamas

63

IFC Review • 2010

Barbados

Barbados: Combatting the Global Recession

by Dr Trevor A Carmichael, QC Chancery Chambers, Barbados

Performing in a Recession

It is now a virtual truism, to the point of almost a trite expression, that adversity brings strength, or at an equally banal level, that crisis provides opportunity.

Albeit an apparently commonplace way of thinking, it nevertheless highlights a commitment to optimism and a recognition of the importance of careful choice. Barbados during the present global recession has mirrored this recognition of the need for heightened action, as its policy makers seek to buttress an economy not insulated from the current global damage.

For the first three months of 2009, Barbados’ real GDP fell by an estimated three per cent, compared to growth of 1.9 per cent for the corresponding period in 2008. It represents the first January to March decline since 2002 and essentially reflects a decline in tourism and construction value-added, with the corresponding impact on related industries both in the traded and nontraded sectors. Furthermore, for the first time since 1995 the capital and financial account recorded a first quarter deficit and consequently the net international reserves of the monetary authorities declined by approximately USD23 million.

During this period, both domestic deposits and credits to the non-financial private sector slowed markedly when contrasted with the comparable period of www.ifcreview.com/Barbados

the previous year. Noteworthy however, were the magnitudes, such that liquidity levels in the banking system were just slightly above those recorded at the end of the year 2008. Concurrently, a small contraction in the treasury bill rate occurred.

The timely start to the sugar harvest may be one of those benefits that came in the era of overall global financial adversity. For as a result, sugar production grew by 11.9 per cent during the first quarter of the year 2009 in stark contrast to two previous consecutive first quarter declines. However, real value-added in non-sugar agriculture remained relatively constant at 0.5 per cent compared to an average growth rate of 2.9 per cent in the first quarters of the four preceding years.

Maybe in recessionary times consumers eat more, for chicken production for the period improved by 2.8 per cent compared to the 2008 decline of 8.8 per cent. This view is not, however, supported by a 9.0 per cent decline in the production of other meats and unchanged output of food crops.

The Central Bank of Barbados has continued judiciously to respond to the global economic dislocation.

As far back as 2007 it had sought to lower the operating costs of businesses and individuals through interest rate reductions. It has continued this policy trend and in February 2009 lowered the minimum deposit rate from four per cent to three per cent with the intention

of recording consequential reductions in the lending rate. This rate is now 225 basis points below its 2007 level and while the weighted average lending rate was 9.80 per cent at December 2007, it stood at 9.33 per cent at February 2009.

Furthermore, a repurchase facility was introduced in February 2009 to attend to any liquidity issues which could arise in the present financial climate. By the end of the first quarter of 2009 the facility had not been used.

The International Dimension

Not unexpectedly, the global financial uncertainty had its impact on Barbados’ international business sector, for the sector recorded a slightly decreased profitability and fewer new entities were formed when contrasted against other years for comparable periods. For example, in the first three months of 2009, 94 new international business companies were formed compared to 150 in the corresponding 2008 period. However, difficult times do sometimes bring good results and the recent experience of Barbados’ less publicised international trust business proves the adage.

International business overall remains a very vibrant element within the economy and the suite of legislation continues to ensure that the jurisdiction remains placed as an ideal centre for the pursuit of legitimate business expectations.

International business companies

Barbados

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IFC Review • 2010

(IBCs) continue to be incorporated within a regulatory framework which applies a rigorous but fair licence application procedure. The relevant legislation was introduced in 1965 and since that time the scope and purpose of the user has changed according to tax and regulatory enactments, particularly in Canada, the United States (US) and the United Kingdom (UK), from where many of the users emanate. The legislation’s use has also been influenced by the nature and type of double taxation agreements which Barbados continues to negotiate and the core treaties which it inherited at its Independence from Britain in 1966. Currently, there are treaties in existence with Canada, the US, the UK, Switzerland, Norway, Sweden, Denmark, Malta, China, Cuba, Botswana, Venezuela, Austria, the Netherlands and Mexico.

The Society with Restricted Liability (SRL) has experienced significant growth in recent years. The flexibility of this vehicle, together with Barbados’ excellent treaty relationships with China, the US and Canada, account for multiple uses in the case of joint venture investments within China, as well as for Chinese entrepreneurs who are pursuing global business deals. It provides a mechanism for structuring investments in civil law jurisdictions in Europe and Latin America. Also, under Barbados law, the SRL is a body corporate and therefore taxable. Yet, for US tax purposes it has similar elements to its cousin, the United States Limited Liability Company.

Accordingly, the members or quota holders of the SRL may elect, pursuant to US tax rules, to treat the SRL as a partnership or branch for all US tax purposes. By filing a prescribed form with the US Internal Revenue Service within the stipulated time period, the entity may qualify as a partnership or branch rather than being deemed a corporation, as would otherwise be the case.

As a very flexible entity, the SRL may be formed as an Exempt or Non-Exempt Society and may be owned beneficially by residents of Barbados. The former is designed primarily for use in international transactions and therefore is prevented from doing business with residents of the Caribbean Community (CARICOM).

However, the latter, with its more local focus, is able to do business with residents of Barbados and CARICOM as well as to participate in Barbadian real estate opportunities which are not available to the Exempt or International SRL. The international insurance sector,

which was introduced in 1983, is of earlier origin than the 1995 SRL regime.

The insurance industry has undergone significant changes in the past two decades as the traditional captive is no longer the sole type of structure in use.

Indeed, the insurance industry and securities industry have today become so closely intertwined that the traditional definition of a captive insurance product is no longer always accurate. Many of the new special purpose vehicles which are being used to insure and reinsure catastrophic risks are embedded within structures that are sometimes more akin to the securities industry than its insurance counterpart. Barbados, like Bermuda and the Cayman Islands, has been host to many of these new structures and it has been the regulated flexibility of these jurisdictions which has facilitated the speedy setting up of new reinsurance entities immediately after the catastrophe of September 11.

On a more general level, Barbados’ tax treaties continue to offer benefits which provide tax-planning opportunities to investors who are seeking to minimise their global tax exposure. Most of Barbados’ treaties allow for reduced withholding tax rates on dividends, interest and royalties.

A case in point is Canadian domestic tax legislation, which provides that dividends paid by a Canadian resident company to a non-resident company are subject to Canadian withholding tax at a rate of 25 per cent. However, under the BarbadosCanada tax treaty, this rate is reduced to 15 per cent.

As a general rule, the treaties also contain tax-sparing provisions. These allow for foreign companies with subsidiaries that conduct business in Barbados under the Fiscal Incentives Act or the Tourism Development Act and consequently pay no corporation tax to be given credit for the Barbados taxes that would have been paid had the Barbados subsidiary not operated under the above mentioned incentive legislation. The Barbados-UK double tax agreement contains such tax-sparing provisions. In addition, the interaction of the Permanent Establishment (PE) and Business Profits Articles of Barbados’ treaties offers protection to Barbadian resident companies from exposure to taxes on business profits earned in another treaty country.

The treatment of capital gains is often important to international investors since, in some of Barbados’ treaties, the right to tax certain gains lies with the

state where the seller is resident. Hence, in cases where the seller is resident in Barbados, and since Barbados does not impose tax on capital gains, no tax is payable either in Barbados or in the other treaty country.

A limitation on benefits provision is also present in a number of Barbados’ tax treaties. Such a provision prohibits treaty benefits from being applied to offshore companies which benefit from a special tax regime or prevent non-residents of a treaty country from enjoying the benefits of a treaty. Barbados’ treaties with Canada, Norway, Sweden, Finland and the UK contain restrictive clauses denying the benefits of the treaty to special incentive companies, such as the IBCs. Although the provisions of the Barbados-Canada treaty do not apply to companies that are entitled to special tax benefits in Barbados, the Canadian domestic foreign affiliate rules permit these companies, once resident for tax purposes in Barbados, to utilise special tax benefits under Canada’s domestic tax legislation. As a result, such income, when repatriated to Canada, is not subject to tax in Canada. The revised Limitation on Benefits Article of the recently renegotiated Barbados-US tax treaty excludes special incentive companies from benefiting from the treaty provisions applicable to dividends, interest and royalties. However, this treaty still has advantages for these companies, principally under the Business Profits Article. There are also benefits for individuals.

The most recently concluded treaties, including those with China and Cuba, do not prohibit the use of special incentive entities from obtaining treaty benefits. These treaties provide significant tax-planning opportunities to investors wishing to minimise their costs when repatriating income from their investment. Indeed, the treaties with China and Cuba contain provisions which make Barbados an attractive jurisdiction through which investments into China and Cuba may be channelled.

Barbados’ international business sector remains vibrant and diversified, and this year introduced its first international business week which locally showcased the industry in all its splendour and glory.

Postscript While the global recession has made its mark, it has been a soft one capable of ongoing erosion and erasure, a feature facilitated by the quality and integrity of the jurisdiction. www.ifcreview.com/Barbados

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IFC Review • 2010

Barbados - Fact File Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Most easterly of the Caribbean islands.

Greenwich Mean Time -4.

270,000.

Bridgetown.

Grantley Adams International Airport.

English.

BDS$ pegged to the US$ at two to one.

Westminster model. +246.

English.

Tourism, banking, trust, insurance, international business companies.

TAX

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

Between 20% and 35%.

25%.

Not for tax entities operating in the offshore sector.

For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies Minimum authorised capital Minimum share issue

All. Not prescribed.

One.

TYPE OF ENTITY

Shelf companies Timescale for new entities Incorporation fees Annual fees

Yes. Average five working days, but 24 hours possible for some urgent requests.

US $2,150.

These vary depending on the type of corporate entity.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

One. None.

Yes. At least one per year.

SHAREHOLDERS

Disclosure

Bearer shares

Minimum number

Public share registry

Meetings/frequency

No disclosure of shareholders to the Registrar of Companies for domestic companies.

However, IBC and SRL insurance and banking entities must disclose shareholders in their licence application forms to the Registrar.

Not allowed.

One. No. A company’s register of shareholders is not available to the public at large.

At least one per year.

ACCOUNTS

Annual return Audit requirements

Required for certain entities.

Audit is required where gross revenue or assets exceed US $500,000.

OTHER

Registered office

Domicile issues

Company naming restrictions

www.ifcreview.com/Barbados

Yes. An overseas incorporated company may: (i) apply to the Registrar of Companies with articles of continuance to move its business to Barbados; or (ii) apply for registration in Barbados as external company. A company migrating from Barbados must file articles of discontinuance with the Registrar of Companies.

As defined by Companies Act.

Barbados

GENERAL OVERVIEW

66

Belize

IFC Review • 2010

Belize: Role Model of a Regulated Jurisdiction

by Gian C Gandhi, SC, Barrister-at-Law, Director General of the International Financial Services Commission of Belize, Belize

Introduction

The year 2009 witnessed a flurry of activity on the international scene aimed at exerting increased pressure on ‘offshore tax havens’ to bring about transparency and to encourage exchange of information in tax matters.

At the 5th Meeting of the Organisation for Economic Cooperation and Development’s (OECDs) Global Forum on Transparency and Exchange of Information, held in Mexico on 1-2 September 2009, agreement was reached on a restructured and strengthened Global Forum with new governance, a new financial structure and the establishment of a peer review group which would be responsible for the “universal, robust and transparent monitoring and peer review process”.

This was quickly followed by the G20 Finance Ministers’ meeting in London on 4-5 September, and the G20 Summit in Pittsburgh on 24-25 September 2009. The jurisdictions that are still on the OECDs ‘grey list’ have been given until March 2010 to comply with internationally agreed tax standards, failing which they may face sanctions.

In fact, the French President, Nicolas Sarkozy (who is reported to have said at the Pittsburgh Summit: “Tax havens, banking secrecy — all that is finished”), has already announced that from March 2010, French banks will close all their branches and outlets in jurisdictions considered to be tax havens. This has caused a stampede among ‘grey-listed’ countries to sign the requisite number (12) of tax information exchange agreements (TIEAs), based on the OECD Model, to meet the deadline.

In anticipation of these rather ominous developments, Belize has already put in place appropriate legislative and

regulatory frameworks to ensure full compliance with the OECDs demands.

OTHER DEVELOPMENTS Money Laundering and Terrorism (Prevention) Act 2008

Income and Business Tax (Amendment) Act 2009

Apart from the TIEA legislation, Belize has enacted a new and powerful Money Laundering and Terrorism (Prevention) Act, which came into force on 12 January 2009. This Act repealed the old Money Laundering (Prevention) Act which had been found to be deficient in several respects.

The key features of this new law are: • it covers both anti-money laundering (AML) as well as terrorism and combatting the financing of terrorism (CFT); • a revised and expanded definition of money laundering adopting the ‘threshold’ approach, ie, by defining it with reference to the penalty attached to the offence. The threshold penalty is imprisonment exceeding 24 months; • a substantial increase in the penalty for a money laundering offence. In the case of a natural person, there will be a mandatory minimum fine of BZD50,000 which may extend to BZD250,000, or a minimum term of five years’ imprisonment which may extend to 10 years, or to both such fines and terms of imprisonment. In the case of a legal person or other such entity, there will be a minimum fine of BZD100,000 which may extend to BZD500,000; • the penalty for terrorism offences is much stiffer — in the case of a natural person, a mandatory minimum of 10 years’ imprisonment which may extend to imprisonment for life; and in the case of a legal person or other such entity, a minimum fine of BZD500,000 which may extend to one million Belize dollars. The penalty for the offence of financing of terrorism is the same as for terrorism itself;

This Act, which came into force on 1 August 2009, empowered the Minister of Finance to enter into TIEAs with other countries with a view to applying international standards on transparency and effective exchange of information relating to tax matters. The Act provides that every such agreement shall be incorporated in an Order which shall be published in the Gazette as a statutory instrument and upon such publication the Order shall have the force of law in Belize notwithstanding anything to the contrary in any other law. The restrictions contained in Section 4 of the Act on the disclosure of tax information shall not apply with respect to a request for information made pursuant to such agreement.

The Act will greatly facilitate the incorporation of TIEAs into municipal law and thus assist in their speedy implementation.

Negotiations on Tax Information Exchange Agreements

Belize has negotiated a TIEA with Belgium and is in the process of signing it. Belize has also approached several other countries offering to conclude such agreements based on the OECD Model.

More recently, the OECD has offered to assist Belize to negotiate TIEAs on a multilateral basis so as to expedite the process of negotiations. It is expected that Belize will reach the threshold of 12 TIEAs set by the OECD well before the deadline of March 2010.

www.ifcreview.com/Belize

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IFC Review • 2010

• the Act retains the extra-territorial jurisdiction of the courts of Belize to try and punish money laundering and terrorism offences regardless of whether the offences were committed in Belize or elsewhere; • the powers and responsibilities of the Financial Intelligence Unit (FIU) as the Supervisory Authority for money laundering and financing of terrorism have been redefined and enhanced; • all reporting entities, such as banks and other financial institutions, are now required to verify the identity of their customers before transacting business with them. The reporting entities must also establish and maintain records of all transactions; • detailed provisions have been made for the reporting of suspicious transactions by banks and other financial institutions to the FIU. In particular, the Act provides for administrative penalties by the FIU for violations of the requirements of this provision; • a requirement for all banks, financial institutions and other money transmission service providers to keep accurate and meaningful originator information on the transfer of funds, including electronic transfers; • detailed provisions to enable the police and the FIU to obtain orders for the production of documents, search warrants, monitoring orders, orders for interception of communications, and mandatory injunctions to enforce compliance; • provision for the freezing and forfeiture of assets in relation to money laundering and terrorist financing; • detailed provisions for international cooperation in the investigation and prosecution of money laundering and terrorist financing offences and other serious crimes. Provision is also made for giving immediate effect to a resolution of the United Nations (UN) Security Council adopted under Chapter VII of the UN Charter, ie, enforcement provisions; and • the establishment of a Confiscated and Forfeited Assets Fund and the receipts and disbursements in relation to such Fund.

On the whole, the Act is designed to ensure that Belize remains fully compliant with accepted international standards regarding anti-money laundering and combatting the financing of terrorism.

International Foundations Bill 2009

To give investors a choice of vehicle for

asset protection purposes, Belize has finalised an International Foundations Bill which is due to be tabled in Parliament shortly. The Bill is designed to meet the demands of civil law countries as well as those of common law jurisdictions.

Some of the salient features of this Bill are: • it seeks to make foundations more userfriendly by cutting out bureaucratic red tape and by inserting provisions to facilitate and enhance efficient but discrete registration, renewal, striking off, restoration, dissolution, continuance and discontinuance of foundations; • every foundation shall have a registered agent who must be a licensed trust agent or trustee until the International Financial Services Commission establishes a specific licence for foundations; • an international foundation will be invalid and unenforceable if not registered under the Act; • registration does not require the foundation charter to be registered – only particulars thereof need to be provided; • provision for exchange control and tax exemptions to international foundations duly registered under the Act; • special provisions for purposes of civil asset protection eg, the non-recognition of foreign judgments and anti-alienation of the foundation endowment as well as the reduction of the limitation period for actions against foundations; • provision is made for substantial security for costs in respect of claims brought against international foundations in order to avoid frivolous litigation; • asset protection provisions are expressly limited to civil proceedings and do not in any way affect criminal proceedings; • adequate provisions, clarifications and limitations in respect of the founder, the foundation endowment, the charitable foundation and other matters affecting the foundation; • specific provisions for disclosure of information relating to a foundation in pursuance of mutual legal assistance treaties, TIEAs or for the investigation of money laundering and terrorismrelated offences.

The Bill draws upon the experience of other jurisdictions in the field of foundations, particularly, Antigua, the Bahamas, Isle of Man and Anguilla.

Mutual Funds (Fees) Regulations 2009

These Regulations, which came into force on 1 August 2009, provide for a revised fee structure for mutual

funds and associated services. The new annual licence fees are as follows: • USD3,500 for a registered public fund; • USD2,500 for a recognised private or professional fund; • USD2,000 for a person licensed as manager or administrator; and • USD3,000 for a person licensed as both manager and administrator.

In addition, there is a one-time application fee of USD500.

Open Ships Registry

Belize’s open ships registry – the International Merchant Marine Registry of Belize (IMMARBE) – made rapid progress during the year under report. A new Director General of IMMARBE, in the person of Captain Encarnacion Samaniego of Panama, was appointed early in 2009 and he moved quickly to expand the network of IMMARBE offices around the world. As many as 23 new Deputy Registrars of IMMARBE were appointed in 2009 alone, making a total of 56 Deputy Registrars strategically located in different countries. There are at present 808 ships flying the Belize flag with a gross tonnage of 1,653,894.80.

The Director General of Belize’s International Financial Services Commission, who is also the Registrar of Merchant Shipping, oversees the functioning of IMMARBE. Looking Ahead

Belize intends to diversify its offshore finance sector by offering new products, such as family foundations and limited liability companies. In view of Belize’s commitment to transparency and exchange of information, it has shifted its focus from confidentiality to the strengthening of asset protection laws as the primary attraction of the country’s investment vehicles. This will be partly achieved by the enactment of the International Foundations Act, which is targeted to become law before the close of 2009.

The Prime Minister and Minister of Finance of Belize, Hon Dean Barrow, who is also the Minister responsible for international financial services, has assured the Belize Offshore Practitioners Association (BOPA) that he remains committed to the continued development of this vital industry, and has pledged his full support to all initiatives to promote its growth and sustainability. www.ifcreview.com/Belize

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IFC Review • 2010

GENERAL OVERVIEW

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Central America.

Central Time Zone.

301,022.

Belmopan City.

Phillip SW Goldson International Airport.

English, Creole, Spanish.

Belize dollar (BZD). Tied at fixed rate to the US dollar (BZD$2=US$1).

Democratic. +501.

English common law.

International business companies (IBCs), trusts, international insurance, mutual fund administration and management, international banking. Trading in securities and foreign exchange; international money lending.

TAX

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

None for international financial services.

None for international financial services.

None for offshore activities.

For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies Minimum authorised capital Minimum share issue

Any currency.

US$1.

US$1.

TYPE OF ENTITY

Shelf companies Timescale for new entities Incorporation fees Annual Fees

Yes. 24 hours.

US$100 if capital is 50,000 or less; US$1,000 if authorised capital exceeds 50,000.

Vary according to service provider.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

One. None.

Permitted.

Subject to memorandum and articles.

SHAREHOLDERS

Disclosure Bearer shares

Minimum number Public share registry Meetings/frequency

No. Permitted but immobolised with local registered agent or foreign professional intermediary.

One. No. As desired by directors or members.

ACCOUNTS

Annual return Audit requirements

No. No.

OTHER

Registered office Domicile issues Company naming restrictions

www.ifcreview.com/Belize

Yes. Continuation of IBCs or LDCs to Belize.

Under the Act no company shall be incorporated under a name that contains the words ‘assurance’, ‘bank’, ‘building society’, ‘trusts’, ‘chamber of commerce’, ‘insurance’, municipal’, ‘royal’, ‘fund’, ‘investment management’.

Belize

Belize - Fact File

70

Bermuda

IFC Review • 2010

Bermuda’s Enhanced International Stature

by Laura Semos, Treaty Advisor, Ministry of Finance, Bermuda

B

ERMUDA HAS NEVER HAD

a history of resting on its laurels. The Island had much to celebrate when the Ministry of Finance announced Bermuda as the first country to ascend from the ‘grey list’ to the ‘white list’ as compiled by the G20 during its London Summit on 2 April 2009. The announcement was coincident with the milestone signing of Bermuda’s 12th tax information exchange agreement (TIEA) on 8 June 2009 with the Netherlands.

Not too long after the 8 June signing, the Minister of Finance, the Hon Paula A. Cox, announced on 2 September 2009 that Bermuda was elected a ViceChair of the Steering Group of the new Global Forum at the 5th Meeting of the Organisation of Economic Cooperation and Development (OECD) Global Forum on Transparency and Exchange of Information for Tax Purposes held in Mexico City 1-2 September 2009.

Over 70 jurisdictions and international organisations were represented by 178 delegates who met in Mexico to discuss progress made in implementing the new international tax standards, and how to respond to international calls to strengthen the work of the Global Forum.

The Global Forum elected Australia as the Chair of the new Global Forum, and China, Germany and Bermuda as Vice-Chairs.

In commenting on Bermuda’s new position as Vice-Chair of the new Global Forum, Minister Cox stated: “I am delighted to report Bermuda’s latest achievement in receiving welldeserved recognition and support from both OECD and non-OECD members alike of the Global Forum. Bermuda is honoured to share responsibility for advancing international cooperation in tax information exchange. We take the responsibility very seriously to represent all members of the Global Forum in achieving a global level playing field based on fairness and transparency.”

Minister Cox continued, “[it] is a reflection of Bermuda holding the top ranking as a white-listed jurisdiction.

Bermuda’s proactive and high-level commitment to supporting the OECD initiative has clearly been duly noted.

Our jurisdiction has worked diligently for almost two decades to arrive at this juncture today, with our first TIEA with the United States in 1988, our commitment to uphold the OECD’s standards in 2000, and the 14 TIEAs we negotiated with our treaty partners on a bilateral basis, to name a few examples.”

What is particularly notable is that Bermuda is the only small international financial centre to be elected to the Steering Group in the capacity of Vice-Chair. The Steering Group is the policy-making body of the OECD Global Forum.

In this achievement, Minister Cox commended the astute diplomatic achievements of Assistant Financial Secretary, Wayne Brown, treaty advisor Laura Semos and treaty negotiation team member for Latin America, Eduardo Fox (a private sector partner), who all represented Bermuda admirably at the Global Forum meetings.

Minister Cox also noted: “The Financial Secretary, Mr. Donald Scott, demonstrated strategic vision and leadership in establishing the Treaty Unit.

This effective Unit is providing value for money as they continue to redouble their efforts as part of the key Ministry of Finance team to ensure we have a seat at the table when important and pivotal decisions are made that can enhance and serve Bermuda’s national interest.”

For Bermuda’s achievement, our Island now shares responsibility in advancing international cooperation in tax information exchange, signifying to the world that Bermuda is a significant player in the global financial system, contributing to international financial stability, recovery from the present

global financial crisis, and setting new standards for establishing the principles that all financial players must abide by to ensure a global level playing field based on fairness and transparency.

When the G20 Group of Finance Ministers and Central Bank Governors congregated in Pittsburgh, PA, later in September 2009, they were presented with a report from the OECD Global Forum. Bermuda’s contributions and our commitment to global standards and our strong governance in these matters are noted in the report.

The importance of this for Bermuda, politically and economically, can not be understated. Safeguarding our reputation as a well-regulated, innovative and advanced financial services jurisdiction is crucial to the Bermudian people, our local businesses, guest workers and international investors. Success in these collective efforts will help to ensure continued prosperity for the generations to come.

Going Forward

Bermuda now has 18 signed TIEAs, many with our major trading partners and members of the G20, and a number of concluded negotiations to be signed in the New Year, significantly surpassing the OECD/ G20 standard of 12 signed TIEAs. With each TIEA, the Ministry of Finance is accruing significant benefits for industry, including being released from punitive measures aimed at uncooperative jurisdictions, signing mini-double taxation agreements and securing exemptions from corporate tax rates on income earned on investments in Bermuda. Together, these benefits send encouraging signals to international businesses to invest in Bermuda entities, and to establish companies in Bermuda. www.ifcreview.com/Bermuda

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IFC Review • 2010

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Hedge Funds Investment Fund Structures Equities Fixed Income Structures Derivative Warrants Insurance Linked Securities

Established in 1971, the Bermuda Stock Exchange is the most widely recognised, offshore securities market platform.

The BSX is a full member of the World Federation of Exchanges.

Bermuda is a British Overseas Dependent Territory and is part of the UK for the purpose of OECD membership.

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72

IFC Review • 2010

Bermuda: the Point of Convergence for Insurance and Capital Markets

by Greg Wojciechowski, President and CEO, Bermuda Stock Exchange, Bermuda

Introduction

BSX provides the ideal listing environment for insurance-linked securities. With an insurance market comprising nearly 1,400 companies, total assets of USD442 billion and gross premiums of USD142 billion1, Bermuda is regarded as a pioneer and leader of the offshore insurance industry and has the third largest insurance market in the world.

At the heart of this insurance market sits the Bermuda Stock Exchange (BSX).

Founded in 1971, and with listed insurance companies and insurancelinked securities worth USD39 billion, the BSX is becoming the exchange centre for the listing of these products. The BSX provides sophisticated and institutional investors with a single location to obtain access to and information on this developing market segment.

Regulating both the insurance and capital markets in Bermuda, is the Bermuda Monetary Authority (BMA), under whose auspices the Insurance Amendment Act 2008 (Insurance Amendment Act) came into effect in October 2009.

Described as an “exciting development for Bermuda” by Andre Perez, CEO of Horseshoe Group, the Insurance Amendment Act provides specific riskbased regulations for the establishment of special-purpose insurers (SPIs) as a new class of insurer within Bermuda’s

insurance class system. It recognises and facilitates the structure of insurance-linked securities (ILS) such as catastrophe bonds (cat bonds). A listing on an internationally recognised stock exchange makes these securities significantly more attractive for potential investors.

This article will explore the impact the Insurance Amendment Act will have on the insurance industry and Bermuda’s capital markets. It will also argue that Bermuda’s ability to remain at the forefront of insurance product innovation, its commercially sensible regulatory regime, its international stock exchange, wider financial and legal services sector and geographical position between the United States (US) and European markets, make it the logical jurisdiction where the insurance world and capital markets should converge.

Insurance-Linked Securities: the BSX – Experience and Regulation

The BSX is the world’s leading fully electronic offshore stock market. It has over 650 listed securities and a combined market capitalisation of approximately USD200 billion.

Unlike other exchanges, the BSX sits at the centre this market, making this exchange one of the few with the unique opportunity to play a significant role in the convergence of the insurance and capital markets. The RG/BSX Bermuda

Insurance Index has become a bellwether indicator of the market performance of publicly listed reinsurance and insurance companies, with both mind and management in Bermuda.

The BSX has already successfully listed seven cat bonds with a combined value of USD370 million, the most recent being the Montana Re Principal at Risk Variable Notes cat bond in December 2009.

How specifically does Bermuda’s Amendment Act and the BSX support this market?

As mentioned earlier, under the Amendment Act, SPIs may be established as a special class of insurer. This makes the vehicle creation far quicker, more cost effective and more efficient. Once an SPI is licensed, attention is placed on the original insured, shifting the focus from the SPI to the ceding entity. This is because the SPI is, by definition, fully funded and therefore perpetually solvent. For example, the minimum capital requirement for an SPI incorporated in Bermuda is just USD1 and it no longer has the same financial reporting and audit obligations as under the previous classification system, provided the issuer has met all of its own regulatory obligations. Also, provided all documents are presented correctly to the BMA, the SPI approval process can be completed within a week.

In addition, the BSX has specific regulations for ILS listings, which are not www.ifcreview.com/Bermuda

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IFC Review • 2010

Why Cat Bonds?

Cat bonds are an alternative asset class and are a compelling diversification tool due to their low correlation with global stock and real estate markets, being linked instead to natural disasters. It is generally felt that they are likely to be used more frequently as a mechanism for capital-raising to ensure sufficient levels of coverage for catastrophic events.

Like every other asset class, they were impacted as a result of the global financial market dislocation. Since then however, the cat bond market has recovered significantly, with the Swiss Re Catastrophe Bond Total Return Index rising 10 per cent2 in the first three quarters of 2009. Some experts believe ‘there is easily enough risk transferred in the market today to fuel a USD50 billion per year market’3.

In a post-Lehman world however, jurisdictions need to be noted for their high standards of regulation and transparency if they are to attract new listings and bring investors back to the capital markets. Investors and issuers will find this at the BSX. Regulated by the BMA, the exchange’s rules are conducive, not prohibitive, to innovative products. The BMA has recently been commended by Michael Foot in his ‘Final Report of the Independent Review of British Offshore Financial Centres’, and has been appointed as a member of the Executive Committee of the International Association of Insurance Supervisors. The BMA has also set itself a roadmap for achieving European Directive, Solvency II equivalence and aims to ensure equivalence under the US Reinsurance Modernisation Initiative.

The BSX, a full member of the World Federation of Exchanges, is also a ‘Recognised Stock Exchange’ of the UK’s HM Revenue & Customs, considered a ‘Designated Offshore Securities Exchange’ by the US Securities and Exchange Commission and is recognised as a ‘Designated Investment Exchange’ by the UK’s Financial Services Authority.

Bermuda: Strong Economic Outlook and Robust Corporate Culture

Bermuda not only stands out as a leader www.ifcreview.com/Bermuda

in risk-based solvency regulation for the global insurance and reinsurance sectors, but also as an economic success story, with a ‘solid track record of macroeconomic stability’4 at a time when many other countries are experiencing economic problems.

Because of this, Bermuda’s indigenous (re)insurance industry has developed strongly and now supports the global insurance industry, particularly in the US. Bermuda presently provides approximately 40 per cent of US and European Union (EU) broker placed catastrophe covers5 and is now the most important offshore supplier of insurance and reinsurance and payer of property and casualty losses to the US6.

Andre Perez, CEO of Horseshoe Group, supports this sentiment: “Since Hurricane Andrew, Bermuda has emerged as the foremost property catastrophe reinsurance market in the world and this new SPI regulation is a step towards consolidating this lead by making it easier for cat bonds to be done out of Bermuda,” he said.

Bermuda has a high per capita income of over USD97,000 and its ‘public debt ratios still compare quite favourably with those of ‘AA’ peers’7.

For those suspicious of offshore jurisdictions, they should be comforted by the BMA’s strengthened regulations governing money laundering and terrorism financing. An independent Financial Intelligence Agency has also been established to monitor suspicious transactions.

After signing 18 tax information treaties, Bermuda has not only secured its place on the Organisation for Economic Cooperation Development’s (OECD) ‘white list’ – a high profile recognition that the country is committed to tax transparency and fully implementing established international standards – but it also has a Vice-Chair position on the steering group of the OECDs new Global Forum.

Stable economic growth and high per capita incomes, combined with easy access to the North American and European markets, has proved a catalyst for attracting not just business, but intellectual capital to the island. “In addition to a tailor-made regulatory regime for cat bonds, Bermuda has an ideal geographical location, and world-class service providers – law firms, insurance managers, and accounting firms – to ensure top of the line service”, continues Perez.

Its close ties to the US markets mean Bermuda hasn’t been completely

unaffected by the recent global financial turmoil, but this has given the Bermudian government and private sector the opportunity to prove its ability to succeed in difficult as well as good times. Unlike some other British Overseas Territories, Bermuda is financially independent from the UK and it has remained so throughout this international financial upheaval.

The Bank of Butterfield’s successful USD200 million preference share offering and successful BSX listing in the first half of this year, guaranteed by the Bermuda government, is a perfect example of Bermuda’s ability to cope on its own and also demonstrates that there is a healthy investor appetite here.

Conclusion

According to Guy Carpenter, between USD1.2 billion and USD2.2 billion of cat bonds could be issued in the fourth quarter of 2009, representing 40 to 55 per cent of the issuance for 2009. A fourth quarter accounting for over 40 per cent of any year’s total issuance has only been reached once, in 20048.

Bermuda can play an important role in supporting this dynamic and growing market by providing listing services for these securities on an internationally recognised stock exchange, a regulatory environment overseen by a well-respected regulator with insurance focus and some of the largest players in the (re)insurance market, all in one place.

While each of the above products is noteworthy in isolation, they create a unique synergistic whole when combined, which results in a very exciting opportunity for Bermuda in the convergence of the capital and insurance markets.

“While we realise that the Cayman Islands have been a leader on cat bonds, we are confident that Bermuda now provides a viable alternative”, concludes Perez.

1. www.bma.bm/uploaded/101News-090928_ME_BIBA_NY_ Briefing_FINAL.pdf 2. Bloomberg 3. ‘Insurance-Linked Securities: Last Asset Class Standing’ by Peter Nakada, RMS RiskMarkets 4. Fitch Ratings, 14th September 2009 5. Association of Bermuda Insurers and Reinsurers (ABIR) 6. Bermuda International Business Association (BIBA) 7. Fitch Ratings, 14th September 2009 8. Guy Carpenter, “Cat Bond Update: Third Quarter 2009”, October 13, 2009

Bermuda

always mirrored by other jurisdictions.

These focus particularly on transparency, something that has become even more important to the end-investors who, in the wake of the current financial market crisis, are looking for higher levels of comfort through enhanced disclosure.

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IFC Review • 2010

Bermuda

Bermuda - Fact File GENERAL OVERVIEW

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

TAX

Personal Income tax

Corporate income tax

Exchange restrictions

Tax information exchange agreements NON-INSURANCE COMPANY SHARE CAPITAL

Permitted Currencies

Minimum authorised capital

Minimum share issue TYPE OF ENTITY

Shelf companies

Timescale for new entities

Incorporation fees

Annual fees ACCOUNTS

Annual return

Audit requirements INSURANCE COMPANY SHARE CAPITAL

Permitted Currencies

Minimum authorised capital

Minimum share issue TYPE OF ENTITY

Shelf companies

Timescale for new entities

Incorporation fees

Annual fees ACCOUNTS

Annual return

Audit requirements DIRECTORS

Minimum number

Residency requirements

Corporate directors

Meetings/frequency SHAREHOLDERS

Disclosure

Bearer shares

Minimum number

Public share registry

Meetings/frequency OTHER

Registered office

Domicile issues

Company naming restrictions

North Atlantic ocean, 774 miles south east of New York.

Greenwich Mean Time - 4.

66,183 in 2007.

Hamilton.

St George’s Parish.

English.

Bermuda dollars (on par with US$ dollars).

Self-governing British overseas territory. +1 441.

Based on English common law.

Insurance.

Nil. Bermuda has an average level of taxation on all persons and entities in the form of consumption based tax.

None, if designated as a non-resident.

For full details, please go to www.ifcreview.com/TIEA

Any, other than Bermuda dollars.

None.

One. No. One-five working days.

Starting from $2,500 based on share capital (exclusive of disbursements).

Starting from $1,995 based on share capital.

No. Yes, unless waived.

Any, other than Bermuda dollars. $1 for special purpose insurer. $120,000 for class 1, class 2, class 3, class 3A or class 3B insurer. $250,000 for long-term insurer. $370,000 for class 1, class 2, class 3, class 3A, or class 3B and as a long-term insurer. $1,000,000 for class 4 insurer. $1,250,000 for class 4 and as a long-term insurer.

One. No. Two-four weeks.

Starting from $12,000 based on class of (re)insurer.

Starting from $4,070 based on share capital ($1,995 for special purpose insurer).

Yes (public document for class 4 insurers).

Yes (statutory accounts must be audited).

Two. No. No. No statutory requirement.

Yes. No. One. Yes. Yes, annual.

Yes (insurers must also have a principal office).

Re-domiciliation permitted.

Cannot contain the following : ‘chamber of commerce’, ‘municipal’, ‘chartered’, ‘co-operative’, ‘building society’.

www.ifcreview.com/Bermuda

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IFC Review • 2010

British Virgin Islands

A Landmark for BVI Litigation – the Commercial Court

by Richard Evans, Associate and Tameka Davis, Associate, Conyers Dill & Pearman, BVI

W

HEN THE ANNALS OF HISTORY are recorded, 2009

ought, in a very real sense, to be regarded as a landmark year for commercial litigation in the British Virgin Islands (BVI). For the year saw not only the establishment of a dedicated Commercial Court in the jurisdiction, but the arrival of its first judge and the opening of a brand new, state-of-the-art court building to house the new facility.

First, some background. The BVI is a member of the Eastern Caribbean Supreme Court (the ECSC), which comprises nine jurisdictions, each of which is served by one or more permanent High Court judges. A common Court of Appeal, which sits in each of the jurisdictions in rotation, serves the ECSC. Several years ago, following negotiations between the ECSC and the BVI government, the decision was made to establish a dedicated Commercial Court to serve the entire system, but with its physical presence within the BVI, in a reflection of the quantity and quality of commercial litigation in the territory.

In his speech to mark the opening of the new 2009/2010 law year, the www.ifcreview.com/BritishVirginIslands

Honourable Chief Justice Hugh Rawlins said of the Commercial Division: “This Division is intended to specialise in and bring a new and dynamic dimension to cross-border litigation … The aim of this division of the Court is to facilitate the speedy and efficient resolution of commercial cases in our system, in a manner that permits the Court to maintain a competitive international profile.”

Hitherto, the ECSC countries have adopted a common set of procedural rules – the Civil Procedure Rules (CPR), governing all keep aspects of the procedural steps in litigation.

The Commercial Court, quite sensibly, has sought to amend these rules in order to provide a procedural framework specifically designed to meet the needs of modern commercial litigation, principally through the introduction of a new Part 69A of the CPR. Part 69A was added to the CPR by the Eastern Caribbean Supreme Court Civil Procedure Rules (Application to the Virgin Islands) (Amendment) Order, 2009. Aside

from a few notable exclusions, Part 69A for the most part mirrors Part 58 of the English Civil Procedure Rules, 2009. The definition of a ‘commercial claim’ is a wide one, and means any claim or application out of the transaction of trade and commerce, and includes claims relating to: • the law of business contracts and companies; • partnerships; • the law of insolvency; • the law of trusts; • the carriage of goods by sea, air or pipeline; • the exploitation of oil and gas reserves; • insurance and re-insurance; • banking and financial services; • collective investment schemes; • the operation of markets and exchanges; • mercantile agency and usages; and • arbitration.

Although not expressed, one would assume that ‘claim’ in this context includes counterclaims. Further, the use of the expression ‘and includes’ necessarily suggests that the foregoing list is not exclusive.

It is notable that the Commercial

British Virgin Islands

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IFC Review • 2010

Court is available to parties from any member of the ECSC, although it remains to be seen the extent to which other jurisdictions make use of the facility.

In addition to passing the definitional test in order to qualify as a commercial claim, a claim must also satisfy the monetary value test. The claim or the value of the subject matter to which it relates must be at least USD500,000.

The commercial judge retains the discretion to include in the list a claim that has not satisfied the monetary value test notwithstanding the definitional and monetary value test, if he considers that the claim is of a “commercial nature and warrants being placed on the commercial list”. There is no guidance as to when a claim will “warrant being placed on the commercial list”. No doubt, a highly material consideration must be that the substance of the dispute is sufficiently specialised to justify being heard by a judge with expertise in the area.

There is also a positive obligation on the part of the legal practitioner for the claimant to file a certificate to the effect that the claim is an appropriate one for treatment as a commercial claim. Even with this certificate, the commercial judge may require that a claim be transferred to any other list if he is not satisfied that the claim is commercial. In practice, it is not anticipated that difficulty will arise in relation to allocation of BVI-based cases to the Commercial Division.

Other noteworthy changes introduced by Part 69A are the requirement that parties include a statement of value in the claim form and that a reply be filed 21 days after service of the defence. Under the non-commercial, old CPR, a reply (if any) was required to be filed 14 days before the case management conference (CMC). This often became impractical, since parties are rarely given that much notice of the fixing of a CMC, which led to applications for an extension of time in which to file a reply being made at the first CMC. These applications were, and are, invariably granted, resulting in the CMC proper being adjourned to a later date. It became commonplace for the first CMC to be ineffective.

By requiring that parties file their reply, if necessary, after service of a defence, Part 69A should reduce the need for adjournments and introduce

a welcome degree of certainty which was previously lacking. Of course, it must also be remembered that many commercial cases in the BVI do not even reach the stage of a CMC, since they focus and conclude at the stage of seeking urgent interim relief, or involve jurisdictional challenges.

An important change has also been proposed in respect of amendments of statements of case. Under the old CPR, a party was at liberty to amend its statement of case (and could amend it as often as it wished) until the CMC was held. At that point, effectively, the statements of case were frozen, with amendments only being allowed with permission of the Court, which could only be granted if there had been a change of circumstance which became known after the CMC. The highly restrictive nature of this provision could occasion real prejudice to litigants in complex commercial matters, and its disapplication to commercial matters (which is proposed) will be widely welcomed.

A change is purely mechanistic – parties are to draw up their own consent orders – it merely encapsulates what pertains in reality and will require very little, if any, change in practice.

Part 69A does not pretend to do anything more than create listing rules and to implement predictable deviations from parts of the CPR. Having seen the draft practice direction currently being circulated, it seems that much of the substantive change to current practice will be made there. Whether this is the appropriate place is quite another issue. Suffice to say that the success of the Commercial Court depends greatly on crafting rules of procedure that are not only forward thinking but also cognisant of our unique challenges.

As its first Commercial Court judge, the Hon Justice Edward Bannister may well look upon his task with both relish and trepidation at the challenge. His background as leading Queen’s Counsel in practice in London Chambers at the chancery/commercial bar without doubt well serves him as he takes up the challenge. It is clear that he is determined to continue the tradition established by earlier judges who sat on commercial matters in the

jurisdiction, of offering user-friendly service directed at the needs of commercial clients who use the Court. He has, it seems, also adopted a keen focus on the administrative and procedural requirements as the Court’s first judge – no less important in many ways from the substantive business and the facilities that it offers.

Aside from these procedural reforms, which when adopted will equip commercial litigators with the necessary tools for effective litigation in the jurisdiction, the Commercial Court also boasts state-of-the-art infrastructure.

In October 2009, it opened the doors of its own court building for business.

Nobody who walks into the court can fail to be impressed by what they are greeted with.

It offers a large and light main court, and a large ground-floor room which can comfortably accommodate trials or open court hearings for large or multi-party disputes. It is understood that the design of the building and its facilities benefited from specialist consultants experienced in court projects. Advanced video teleconferencing facilities are installed and one senses that the building is designed very much with the future in mind. Separately, an extremely spacious chambers hearing room is provided – a necessity in a jurisdiction which often convenes large hearings in chambers matters.

Together with these central features, the ancillary facilities that one would expect of large meeting rooms and advocates room are provided.

In short, in terms of its physical appearance and specifications, the Commercial Court building offers all that its users would expect from a modern, high-tech court facility.

Over the last several years, the level of high-value commercial litigation has increased markedly in the BVI. Notwithstanding the recent economic downturn, this long-term trend will surely continue. The creation of the Commercial Court, and the dedication of many to its success, is an impressive and important testament to the confidence in the BVI litigation product.

This article is not intended to be a substitute for legal advice or a legal opinion.

It deals in broad terms only and is intended to merely provide a brief overview and give general information. www.ifcreview.com/BritishVirginIslands

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IFC Review • 2010

by Sherri Ortiz, Executive Director, British Virgin Islands International Finance Centre, BVI

T

HERE IS NO DOUBT THAT 2009

has been a year of transition for the global financial services industry.

There has been an unprecedented shock to the financial system, moving governments and regulators to take action; and we began the year with an increasing amount of pressure being put on the doorstep of smaller financial centres like the British Virgin Islands (BVI).

As an international finance centre (IFC), our reputation and the way we do business has always been a key part of our strategy for keeping our competitive edge – meeting international expectations is a part of what we do. We welcome the scrutiny of the international community, as the BVI has long been focused on a robust regulatory standard.

G20 and OECD

The meeting of the G20 in London last year established the need for urgency in increasing transparency in tax matters, with the OECD introducing new standards for exchanging information. The BVI has already surpassed the requirements set by the OECD having signed 15 tax information exchange agreements (TIEAs) and we will continue to sign further agreements with significant partners over the course of this year.

In addition, the BVI has been invited to join the Peer Review Group (PRG) which was formed at the OECD Global Forum on Taxation in Mexico in September 2009. The PRG will be responsible for assessing the implementation of OECD standards in finance centres of both member and non-member jurisdictions of the www.ifcreview.com/BritishVirginIslands

Global Forum, based on: • availability of information; • appropriate access to the information; and • the existence of exchange of information mechanisms.

The PRG will ensure that there is a monitoring and assessment process which is universally applied to all finance centres.

The Foot Review

At the end of 2008, the UK Treasury asked Mr Michael Foot to conduct a review of the UK’s nine Overseas Territories and Crown Dependencies’ finance centres, which includes the BVI. In his ‘Final Report of the Independent Review of British Offshore Financial Centres’, Mr Foot recognises the BVI as a wellregulated jurisdiction and highlights some unique rules we have in place that have helped to maintain our good reputation, including the Know-Your-Customer standards and beneficial ownership rules. We have already met one of the report’s core recommendations by having signed TIEAs with our economically significant partners.

Regulation

In the BVI we place great importance on the standards of our regulation. As with all advanced financial centres, the BVI maintains an independent regulator, the Financial Services Commission (FSC), which became the first institution to be admitted to membership of the International Organisation of Securities Commission (IOSCO), on the basis

A Well-Respected Centre for International Finance

The BVI strikes the right balance between meeting the business and financial needs of the international community and maintaining regulatory and corporate governance policies that meet, and in many cases exceed, international best practice standards. This approach continues to give the BVI a number of clear advantages for the international business community, including: • enduring political and economic stability; • a business-friendly operating environment; • efficient company formation and administration processes; • a pool of knowledgeable and qualified business and legal professionals; • a well developed infrastructure, including excellent telecommunication services; • no currency exchange controls and the use of the USD as the official currency; • a commitment to enact legislation that meets business needs and protects the integrity of the BVI; and • a strong partnership between the public and private sectors.

The Role of BVI IFC

The BVI IFC has played a pivotal role in the promotion and marketing of the BVI as a leading

British Virgin Islands

British Virgin Islands: Meeting the Challenges of the Global Financial Environment

of that organisation’s Multilateral Memorandum of Understanding on Consultation and Cooperation and the Exchange of Information.

In addition, the BVI received a very positive report from the Caribbean Financial Action Task Force on its efforts to combat money laundering and terrorist financing at the end of 2008. The BVI was widely praised for setting up the FSC as an autonomous regulatory authority responsible for the regulation, supervision and inspection of all financial services in the BVI. 2009 saw the establishment of the Eastern Caribbean Supreme Court (ECSC) which is a world class commercial court based in the BVI. The court is expected to become a key litigation centre for offshore lawyers, with commercial cases due to be heard there from the ECSC circuits of Anguilla, Antigua and Barbuda, Grenada, Dominica and the BVI.

British Virgin Islands

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IFC Review • 2010

financial centre. Established in 2002 as part of the Government’s growing commitment to the financial services industry, the aim of the IFC is to give a voice to the BVI’s financial sector. The IFC is committed to ensuring that the BVI retains the unique balance it has created in having a sound regulatory framework, an entrepreneurial business community and a government that is committed to developing innovative legislation. The launch of the IFC marked the final stage in the government’s plans to separate the marketing/promotional and regulatory/supervisory functions.

Regulation is now the sole responsibility of the BVI Financial Services Commission (FSC), which was also established in 2002.

Mutual Fund Registration, Management & Administration

The BVI Mutual Funds Act 1996, allows for three categories of funds (professional, private and public) to be established, whilst providing for investor protection commensurate with their level of sophistication.

There are currently no regulatory restrictions on investment policies in the BVI. The mutual funds legislation is not complex and, as a result, funds can be established in the BVI by using simple and costeffective structures. Professional funds can receive fast-track approval from the BVI FSC from within three to five days of submission of an application for recognition.

Most fund entities are structured as limited liability companies although partnership structures are also being formed, especially where the client has a limited partnership onshore and is seeking to mirror the structure offshore.

There is also no requirement in the BVI for service providers of a BVI fund such as the manager, administrator or custodian to be a resident in the BVI. However, several international service providers are present in the BVI to provide services locally.

Trust Settlement

Due to the Virgin Islands Special Trust Act, 2003 (VISTA), the BVI has consolidated its position as the location of choice for international trust settlements and operations. VISTA has

been acknowledged by trust and estate practitioners and other international experts as a pioneering piece of legislation that provides a world leading regime for the trusts and estates industry. Implementation of the Financial Services (Exemptions) Regulations in August 2007 clarified the circumstances under which a BVI private trust company must be licensed. The recent Private Trust Company legislation has further enhanced the BVI’s international reputation for trusts and estate planning products, with VISTA purpose or charitable trusts being ideally suited to holding shares in Private Trust Companies.

Business Companies

The BVI Business Companies Act, 2004 (the Act) has received positive reviews for its flexibility from legal practitioners around the world.

Five different types of companies can be incorporated under the Act. The Act includes statutory merger and consolidation provisions, which make it possible for two entities (only one of which needs be a BVI entity, provided certain conditions exist) to merge with all the assets of both entities consolidated into the surviving entity. This has made the BVI more attractive for joint venture vehicles and for the restructuring of companies and funds. BVI companies can also list on worldwide stock exchanges including LSE, AIM, NYSE, NASDAQ, ISE, TSX, BOVESPA and HSX. Captive Insurance Management

BVI has developed into a major international insurance centre in recent years. The growth in stature for the BVI as an international captive insurance jurisdiction has also been aided by the strong presence of complementary service providers such as internationally renowned law firms and accountancy practices.

Accounting and Legal Services

The largest offshore law firms all have a presence in the BVI and legal services are growing on the Islands with the recent influx of several prominent law firms, including Withers, which chose BVI as the location for its first foray into the offshore legal sphere. BVI lawyers are widely respected throughout the

financial services sector and several BVI firms have opened offices in London and Hong Kong, all of which work closely with their BVI offices. In addition, many of the major independent trust companies and accountancy firms are also in the BVI and there are clear signs of a growing demand for their services, particularly in the areas of mutual funds audit and insolvency practice.

Shipping Register

Since 2008, BVI has been an acknowledged Category 1 Red Ensign register, which means that the jurisdiction is one of only ten centres around the world where mega and super yachts of up to 3000 gross tonnage and general cargo ships of unlimited tonnage can be registered. The BVI Shipping Registry offers the highest practical standards in technical expertise, safety management and quality assurance, compatible with the Red Ensign Group (REG), to assure first class services. The Island’s facilities include: • registration of ships; • mortgages; • discharge of mortgages; • change/transfer of ownership; and • full corporate, legal, telecommunications and courier services.

Ships flying the BVI Red Ensign flag are British ships and are entitled to British Diplomatic and Consular support and Royal Navy Protection.

Conclusion

The BVI International Finance Centre is committed to maintaining the Island’s position as a well regulated, pre-eminent, progressive jurisdiction for international business services. The BVI is a globally integrated and transparent jurisdiction: whether it is through tackling financial crime, through robust regulation and enforcement or the provision of fiscal transparency through adherence to internationally agreed standards, we continue to demonstrate our commitment to being a financial services centre with the highest of standards. By its example, BVI will continue to state the case that whatever the size or the location, reputable and well run international finance centres make a valid contribution to a stable and successful global financial services industry. www.ifcreview.com/BritishVirginIslands

IFC Review • 2010

British Virgin Islands - Fact File

TAX

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal Centre’s expertise

Personal income tax Corporate income tax

Exchange restrictions

Tax information exchange agreements SHARE CAPITAL

Permitted currencies

Minimum authorised capital

Minimum share issue

Eastern Caribbean.

Greenwich Mean Time -4.

App. 26,000.

Road Town.

Beef Island.

English.

US $.

Democratic 13-member Ministerial Government. +1 284.

System based on English common law. UK Privy Council is final court of appeal.

Renowned as a corporate domicile for business companies, trust settlements, captive insurance, mutual funds and shipping registration.

0%.

No income (profit) tax. Payroll tax-resident companies: 10% or 14% (employees: 8% fixed, employers: 2% or 6% depending on business size). Non-resident companies: same as resident, on BVI -based employees only.

None.

For full details, please go to www.ifcreview.com/TIEA. All currencies permitted. Official currency: US $.

No minimum.

One share.

TYPE OF ENTITY

Shelf companies

Timescale for new entities Incorporation fees

Annual fees

BVI business companies limited partnerships, segregated portfolio companies, restricted purpose companies, companies limited by shares and/or guarantee.

24 hours (BVI Business Companies, LPs).

Business companies, US$350-US$1,100 depending on share capital structure (number and type of shares authorised for issue); limited partnerships US$500.

Business companies, US$350-US$1,100 depending on share capital structure (number and type of shares authorised for issue); limited partnership US$500.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

One. None.

Yes (must be held by authorised/recognised custodian.

As directors determined.

SHAREHOLDERS

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

No. Yes. One. No. As directors or shareholders determine.

ACCOUNTS

Annual return

No.

Audit requirements

No.

OTHER

Registered office Domicile issues Company naming restrictions

www.ifcreview.com/BritishVirginIslands

Yes, must be in BVI as must be the registered agent.

Re-domiciliation to and from BVI allowed under BVI law.

Restricted words such as ‘banking’, ‘insurance’, ‘fund’, ‘trustee’ will not be allowed without relevant licence.

British Virgin Islands

GENERAL OVERVIEW

79

Cayman Islands

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IFC Review • 2010

Cayman Funds: Lessons Learned as Hedge Fund Investments Surge

by Mark Lewis, Managing Partner – Clients and Ingrid Pierce, Partner, Walkers, Cayman Islands

A

S 2009 HAS PROGRESSED,

hedge fund investments have returned to prominence. This shift has been as welcome offshore as it has been for investment managers located in the world’s major onshore financial capitals. After seeing record redemptions in the final months of last year, total hedge fund assets have increased steadily toward USD2 trillion again in 2009, according to industry database HedgeFund.net. With the Dow Jones Industrial Average crossing the 10,000 threshold in mid-October 2009, Hennessee Hedge Fund Index reports that improving equity markets have helped make January-September 2009 the best first nine months of a calendar year for hedge funds in 12 years. The Hennessee Hedge Fund Index itself rose 21 per cent in that time period.

As the leading offshore jurisdiction for hedge funds, the Cayman Islands have seen international investment trends and sentiment about investment funds strongly reflected in the pattern of hedge fund registration and terminations in the Cayman Islands.

In fact, Cayman has regained much of the ground it lost in the earlier part of the year.

Third quarter 2009 hedge fund registration statistics just released by the Cayman Islands Monetary Authority (CIMA) indicate that a total of 9,838 active hedge funds were registered in Cayman as of 30 September 2009.

This represents a relatively modest drop of 4.4 per cent from the 10,291 peak in registrations at the end of the same period in 2008. Hedge fund terminations are now back at normal market levels after increased termination activity in December 2008 and early 2009. Cayman has seen an increase in registrations of new hedge funds in the middle part of 2009, with 319 new funds registered in Q3 2009, at an average of more than 106 per month.

Lessons About Liquidity

Looking back at the closing months of 2008, liquidity was the outstanding contributor to hedge fund difficulties and failure. Liquidity affected the www.ifcreview.com/CaymanIslands

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IFC Review • 2010

Evolution of Offering Documents

As a result of the recent financial crisis, many funds will no doubt continue to evolve their offering documents. A number of funds have updated their fund documents, often to provide greater flexibility for investment managers and directors to better steer the fund through periods of illiquidity.

In other cases it is appropriate to introduce more prescriptive provisions that describe with particularity the www.ifcreview.com/CaymanIslands

powers of the directors and the circumstances in which they may exercise such powers. Whichever approach is adopted, investor protections must be preserved.

Impact of In Re Strategic Turnaround Master Partnership

Issues related to hedge fund redemptions received significant media coverage towards the end of 2008, including a decision of the Cayman Islands Court of Appeal in December 2008 in the case of In Re Strategic Turnaround Master Partnership, Limited.

In that case, it was held that redemption is a process which is not complete until the redeeming investor has received due payment of its redemption proceeds and its name has been removed from the register of shareholders. The Cayman Islands Court of Appeal confirmed that a redeeming shareholder becomes a creditor on the redemption date, but may or may not have standing to petition for the winding up of the fund.

In the Strategic case, the Board of Directors of the fund suspended ‘redemptions’ after the redemption date but prior to the date on which payment of the redemption proceeds fell due. The fund’s articles permitted the fund to suspend payment of redemption proceeds and the Court regarded the Board resolution as covering this point. On the assumption that the suspension was properly imposed, it was held that the redeeming shareholder did not have standing to petition for the winding up of the fund, because at the date of presentation of the petition, the redemption proceeds were not then due and payable.

The Court also held that until the redemption process is complete, a redeeming shareholder remains a member of the company, bound by the ‘majority’ of the fund’s articles.

While the decision raises a number of questions, its impact has been somewhat reduced by the passing of certain changes to the Cayman Islands Companies Law (2007 Revision). In effect from 1 March 2009, the rules for the winding up of companies were expanded, giving contingent and prospective creditors statutory power to petition for the winding up of a corporate fund.

Thus, a redeeming shareholder technically has standing to petition for the winding up of a fund, even if the date for the payment of redemption proceeds has not passed. However, any such redeeming shareholder (or indeed any prospective or contingent creditor) would still have to establish one of the statutory grounds for insolvency, for example that the fund is unable to pay its debts or that it is just and equitable for the fund to be wound up. We take the view that the prospects of success on such a petition would be slim if the only basis for the claim is the nonpayment of an investor’s redemption proceeds. The remedy of winding up on a just and equitable basis is discretionary and the Court would have regard to all the facts before making a winding up order.

If a fund is concerned about this possibility, it could enter into agreements with its investors not to present a winding up petition against the fund during this period. The revised Companies Law now gives statutory recognition to non-petitions contracts and some funds are already utilising this mechanism to agree the circumstances in which investors will refrain from taking action to put the fund into liquidation.

The Matador Investments Decision

The Cayman Court has more recently considered the question of payment of redemption proceeds in the case of Matador Investments Ltd. On the facts of that case, the Court granted a winding up order on the basis that the fund failed to satisfy payment of the redemption proceeds in accordance with the fund documents. The purported suspension of redemptions was not imposed on a timely basis and the fund had no authority to suspend payment of redemption proceeds. The decision is currently under appeal.

Looking Forward

The Cayman Islands investment funds industry underwent significant stress towards the end of last year.

However, the lessons learned from the impact of the financial crisis, combined with supportive legislation and greatly improved returns for hedge funds so far for 2009, all point to a positive outlook for the Cayman Islands fund industry.

Cayman Islands

strong performers as well as the weak – even funds which had performed well in the market were affected by a surge in redemption requests from nervous investors anxious to re-balance investment portfolios.

Our collective experience from this period of difficulty suggests that funds that were properly structured with foresight and which had planned for liquidity issues from the outset and incorporated mechanisms to deal with illiquidity in their constitutive documents faired relatively well.

Rather than having to undertake the lengthy and often difficult process of obtaining shareholder approval for introducing side pockets to isolate underperforming assets or gates to manage redemptions, funds with appropriate liquidity mechanisms were able to act quickly, often meaning the difference between survival and failure.

In our experience, many funds have sought to restructure in response to liquidity issues in order to preserve value and retain investors either within the same fund or in a new structure.

Some funds have taken advantage of gate provisions, where available, but many older funds simply do not have the ability to limit redemptions in this way. Side pockets have frequently been utilised to deal with hard-to-value securities. Alternately, some funds that do not possess adequate side pocket provisions have been able to simulate the effect through a synthetic side pocket, into which illiquid assets are transferred. This process, which involves forming a special purpose vehicle, will only usually be appropriate if the fund has the ability to pay redemption proceeds in kind but cannot readily transfer the underlying assets in satisfaction of redemption proceeds. Where the circumstances are right, the technique has allowed funds to continue calculating their net asset value and keep on trading.

Cayman Islands

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IFC Review • 2010

Cayman Islands - Fact File GENERAL OVERVIEW

Location

Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

The Cayman Islands are in the western Caribbean about 150 miles south of Cuba, 460 miles south of Miami, Florida and 167 miles northwest of Jamaica.

Eastern Standard Time (Nov–Feb) Central Standard Time (Mar–Oct).

App. 50,000.

George Town, Grand Cayman.

Owen Roberts International Airport.

English.

Cayman Islands dollar (CI$) Fixed at CI$1.00: US$1.25.

Parliamentary democracy with judicial, executive and legislative branches. +345.

Common law and statute.

Investment funds, capital markets, banking, trusts, etc.

TAX

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

None.

None.

None.

For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies Minimum authorised capital Minimum share issue

No restrictions.

No restrictions.

One share issued to the subscriber on incorporation by operation of law. A Cayman Islands company must always have at least one member.

TYPE OF ENTITY

Shelf companies Timescale for new entities Incorporation fees Annual fees

24 hours for an express incorporation.

Fees start at approximately US$732 for an Exempted Company.

Fees start at approximately US$732 per annum.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

One. Two if regulated.

None.

No requirement.

None.

SHAREHOLDERS

Disclosure Bearer shares Minimum number

Public share registry Meetings/frequency

No public disclosure for exempted companies.

Allowed but with very strict custody rules.

One share issued to the subscriber on incorporation by operation of law. A Cayman Islands company must always have at least one member.

Annual return Audit requirements

None.

None unless regulated.

None for exempted companies.

None.

ACCOUNTS

OTHER

Registered office Domicile issues Company naming restrictions

Must be located in the Cayman Islands.

Transfer of domicile is permissible.

Yes – no two companies may have the same name and certain other restrictions as specified in the Companies Law (as amended). www.ifcreview.com/CaymanIslands

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IFC Review • 2010

Cyprus

The Cyprus Holding Company

by Christos Mavrellis, Chrysses Demetriades & Co LLC, Cyprus

T

HE TERM ‘CYPRUS HOLDING COMPANY’ has been in use in

tax consultancy circles worldwide since the introduction of Cyprus’s current tax regime in 2002, ahead of its accession to the European Union (EU) when the country aligned its laws with those of the Acquis Communautaire.

Usually, the term ‘holding company’, when used in legal documents, denotes a company that controls either through the holding of the majority of voting rights or the right to nominate the majority of the board of directors of another company.

However, in Cyprus tax legislation, when referring to the tax treatment of the dividends received by a Cyprus company the term holding company has a wider meaning. Subject to certain conditions, it is extended to cover not only dividends received by a Cyprus holding company from a subsidiary, but from any shareholding in a foreign company which represents more than one per cent of the issued share capital of that foreign company, subject to the criteria laid out below.

Effectively, if a Cyprus company or a foreign company which is managed and controlled in Cyprus and is thus a tax resident of Cyprus receives any dividends from another company, such dividend is free from income tax and it is also free from any withholding tax on dividends, which in Cyprus is known as special defence contribution. If that other company is a foreign company it may also be free from Cyprus income www.ifcreview.com/Cyprus

tax and special defence contribution under certain conditions.

In this short article we shall not analyse the tax treatment of dividends payable by a Cyprus-tax resident company to another Cyprus-tax resident company or to their ultimate shareholders who are Cyprus tax residents, but instead shall focus on the tax treatment of royalties received by a Cyprus holding company from foreign companies or corporations.

We will also look at the tax treatment of any dividends which a Cyprus holding company pays over to its nonresident shareholders, individuals or corporations.

If a Cyprus holding company holds any number of shares in the capital of a foreign company and receives any dividend from it, this dividend will not be subject to any income tax or special defence contribution in Cyprus provided that either: • no more than 50 per cent of the profits of the foreign company that pays the dividend emanate directly or indirectly from passive investment income; or • the foreign company’s profits are subject to tax in the foreign country at rates in excess of five per cent.

Of importance is the reference to direct or indirect income from passive investment. This means that the important criterion is not the character of the income received by the foreign company, which may in most cases be a dividend, but the original source of the income from subsidiaries or

participations down the line, which in almost all cases, with minor exceptions, is active income.

By application of the above provision the dividends which do not qualify for the exemption are effectively dividends from minor participation or from substantial participation in huge listed companies abroad where the holding is under one per cent.

Even in such cases, however, by application of the relevant treaties exemptions may be applicable, again resulting in no tax or special defence contribution in Cyprus.

The one per cent minimum holding in a foreign company which was a requirement for the participation exemption to apply has been abolished in an effort to further promote Cyprus as a centre for the structuring and administration of mutual funds and other collective investment vehicles.

It is also very important to note that the application of double tax treaties may lead to low or even no withholding tax on dividends in the foreign country despite the fact that there will likewise be no tax in Cyprus on such dividends, as explained above.

Even in cases where no treaty exists, Cyprus unilaterally grants credit for any tax on dividends paid abroad and such credit extends to and takes into account the tax paid by the foreign company on the relevant income out of which the dividend is paid.

When a Cyprus holding company owned by shareholders who are not tax

Cyprus

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IFC Review • 2010

residents of Cyprus declares a dividend, such dividend can be paid to these non-resident shareholders without any withholding or other tax or special defence contribution in Cyprus. When investors who are not tax residents of Cyprus (whether or not they are companies/corporations in countries which are European Economic Union members) acquire shares in a Cyprus company, which in turn acquires shares in foreign companies or corporations, they may ultimately receive dividends via the Cyprus holding company and obtain the benefits of the Cyprus double tax treaties. The Cyprus double tax treaty network is quite extensive, covering over 40 countries in various parts of the world.

It is also important to point out that a Cyprus holding company is not a special corporate entity from either a corporate law or tax law perspective, but is just an ordinary company and could engage in other activities as well, including trading and whatever else a company may do. The tax treatment of dividends as explained above is not related to the company itself but to the nature of the particular income.

Cyprus holding companies can

also be used as vehicles to raise funds through listing at international stock exchanges or alternative markets and quite a number of them have been successfully used in this direction.

Recently, Cyprus Companies Law has been amended to remove certain burdensome requirements for translation of prospectuses into Greek, which can now be accepted in other languages, and also to release public companies from the requirement to file a prospectus under certain conditions in line with the EU Prospectus Directive.

Other income of a Cyprus holding company not falling within the definition of dividend from the worldwide operations of a company which is a tax resident of Cyprus is subject to corporation tax at the rate of 10 per cent, which is the lowest corporation tax in the EU. Double tax treaties also apply with respect to such other income. In addition, unilateral relief is granted on any tax that would be payable in Cyprus on income on which tax has been paid abroad, whether there is a treaty or not.

The dividends which the Cyprus

company may pay to its non-resident shareholders from any such other income are also tax-exempt in Cyprus, in the same manner as any dividends emanating from dividend income.

Judging by the information provided above, it is not hard to see why the Cyprus holding company, and Cyprus companies in general, are regarded as the best vehicles for investment and operations in various countries.

Cyprus is considered a gateway for investments by EU investors in other EU or non-EU countries, as well as for investment by non-EU investors into EU countries.

A favourable tax regime, coupled with the well-established legal system of Cyprus which is based on common law, and the high standards of professional services have led to the success of Cyprus as an international financial centre.

Recently, Cyprus companies have been listed in international stock exchanges, such as the London Stock Exchange, the Alternative Investment Market, the Frankfurt Stock Exchange and Oslo, a sure sign that international recognition of this friendly jurisdiction is on the rise.

www.ifcreview.com/Cyprus

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IFC Review • 2010

GENERAL OVERVIEW

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Cyprus is an island in the eastern Mediterranean Sea. Greenwich Mean Time +2.

820,000.

Nicosia.

Larnaca Airport and Pafos Airport.

Greek and Turkish are the official languages but English is widely spoken.

Euro as of 1 January 2008.

Democratic Republic member of the EU. +357.

Based on common law and harmonised to Acquis Communautaire.

Financial centre, double tax treaties, tax incentives, lowest tax in EU.

TAX

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

Depending on income. Maximum 30%.

10% on profits.

None.

For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies Minimum authorised capital Minimum share issue

Any. No minimum.

Usually one thousand.

TYPE OF ENTITY

Shelf companies Timescale for new entities Incorporation fees Annual fees

Available.

Five to ten days with acceleration fee, subject to name approval.

Depends on the authorised share capital of the company, at the rate of 0.6%.

Annual return filing fee (€17).

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

One. Local not required but advisable for tax purposes.

Yes. Obligations for annual meeting.

SHAREHOLDERS

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Names of the shareholders disclosed. Use of nominees possible.

No. One. Publicly accessible records.

Written decisions signed by all directors possible.

Annual return Audit requirements

Yes. Yes, small companies – as defined – are exempt.

ACCOUNTS

OTHER

Registered office Domicile issues Company naming restrictions

www.ifcreview.com/Cyprus

Yes. Yes. Any word that the registrar considers undesirable or that is similar or identical to an existing company name, or that implies legal activity or royal or government patronage. Any words, among others, which include ‘asset management’, ‘assurance’, ‘bank’, ‘credit’, ‘dealer’ etc.

Cyprus

Cyprus - Fact File

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Dubai

IFC Review • 2010

Dubai International Financial Centre

by Abdulla Mohammed Al Awar, CEO, Dubai International Financial Centre Authority, DIFC

I

N A FAST-CHANGING ENVIRONMENT, the

GLOBAL

Dubai International Financial Centre (DIFC) has confirmed its status as an important jurisdiction. The DIFC was established to provide the MENASA (Middle East, North Africa and South Asia) region with a gateway to facilitate inward and outward flows of global capital and investment. Its success has largely been due to its solid infrastructure, internationally recognised regulatory environment and strong regional relationships. DIFC has already achieved global recognition as an independent international financial centre, providing a fully transparent operating environment upheld by a world-class regulatory and legal framework. It is the leading and fastest growing financial centre in the Middle East supporting regional growth, not just the growth of Dubai itself.

The City of London’s Global Financial Centres Index (GFCI) has charted the growing importance of Dubai, and has identified it as the leading financial centre in the region between Europe and Asia, the 23rd most important international financial centre overall, and the number one financial centre set to become more significant in the next two to three years.

Indeed DIFC recently conducted its

own study and commissioned KPMG in the United Arab Emirates (UAE) to independently assess the Report. The Report highlights the progress made

by Dubai in establishing itself as a leading international financial centre.

This study was conducted with the objective of benchmarking DIFC’s and Dubai’s ‘competitiveness’ against that of other leading financial centres around the world and the region. One of the notable aspects of the Report is the evaluation of DIFC as a separate financial centre with individual competencies.

DIFC was ranked seventh in the Report on the strength of its worldclass legal and regulatory standards; independent regulator and judiciary system; and strong value offering for financial businesses. In addition, DIFC’s infrastructure and business environment, custom-designed for the financial industry, made it a more attractive jurisdiction for many institutions that other more established centres.

The DIFC has just reached its milestone fifth anniversary, and its incredible achievements during such a relatively short period of time have ensured that is has already established itself as a world-class onshore financial

district with more than 850 companies, including leading firms from across the region and the globe, licensed to do business from the Centre. DIFC’s strategic location helps bridge the time gap between the financial centres of London and Hong Kong, and serves a vast region stretching from central Asia and the Indian subcontinent to north and east Africa.

The primary sectors of focus for DIFC include: • banking and brokerage; • asset management; • reinsurance and captive insurance; • Islamic finance; and • ancillary services.

Some of the most important aspects of the DIFC include: • 100 per cent foreign ownership; • zero percent tax rate on income and profits; • extensive tax treaty network for UAE incorporated entities; • freedom to repatriate capital and profits without restrictions; and • state-of-the-art environment and infrastructure.

Apart from the more technical and legal attributes, the DIFC is also an attractive and increasingly popular destination for financial services professionals from around the world www.ifcreview.com/Dubai

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IFC Review • 2010

World-Class Jurisdiction

The financial services industry across the globe is in a period of transition.

The industry’s landscape is changing as new areas of wealth arise, particularly in Asia and the Middle East, and new jurisdictions are emerging as part of these changes. There is an acknowledged eastward shift in the global economic centre of gravity, and this shift places Dubai increasingly at the heart of this new geography.

The DIFC operates within one of the fastest growing regions of the world, and its location provides a natural advantage. While the West and the Far East have more than a few established financial centres catering to those markets, the MENASA region currently do not have truly mature international financial centres to form the vital link between the East and the West. DIFC is uniquely positioned to bridge that gap. It has established a recognised and credible track record of regulation and has sought to build international confidence through its world-class, independent financial services regulator the Dubai Financial Services Authority (DFSA), and in the regulatory standards that it administers. The success of the DIFC in attracting top quality financial firms to the Centre has, in part, depended upon the visible presence of efficient, modern and independent regulation and a world-class judicial system.

As the world’s financial architecture undergoes fundamental change and realignment, the DIFC is poised to remain as a major global player and a strong and vibrant financial centre over the coming years.

The Dubai Financial Services Authority

In fulfilling its mandate as the sole independent financial services regulator for the DIFC, the DFSA performs a number of functions: • policy and rule-making; • authorisation; • recognition; • supervision; • enforcement; and • international cooperation.

The DFSA’s stated approach is: ‘To be a risk-based regulator and to avoid unnecessary regulatory burden.’ The www.ifcreview.com/Dubai

belief is that regulation should be directed to the mitigation of risks that would otherwise be unacceptable. In addition, the compliance obligations should be proportionate to the mitigation of those risks within a framework that enables regulated entities to effectively and efficiently meet their compliance obligations.

Under this model, the DFSA sets priorities for the use of all resources and has adopted a continuous risk management cycle which identifies, assesses, prioritises and mitigates unacceptable risks to our regulatory objectives or a particular sector of our financial services industry. The DFSA recognises that these risks may arise from within or outside the DIFC so regular monitoring of regional and international financial markets and trends is undertaken. This systematic assessment of risk allows for the identification of common issues across the regulated community and affords the chance to undertake the necessary thematic work in response.

The DFSA’s risk-based philosophy applies to all internal Divisions and Departments and to all dealings with regulated entities. This focus on outcomes rather than the way they should be achieved results in more effective and efficient riskbased regulation.

The DFSA believes that it is appropriate to clearly and regularly state its approach to regulation to ensure it is clearly understood by all external and internal stakeholders.

This approach to regulation, together with the DFSA’s vision, mission and values, form the foundation upon which the work is carried out.

Among the core focus’s of the DFSA is to protect market participants, provide a level playing field and maintain confidence and integrity in the market. Having a sound regulatory framework aligned to international best practice, with the most relevant regulatory policy from other jurisdictions incorporated, has enabled the DFSA to evolve into a well functioning and responsive regulator.

Today, the DFSA is supervising more than 320 entities in the DIFC. Effective supervision and control of risk is handled by a team of internationally respected regulators with an average of 15 years regulatory and compliance experience per Executive. So as to ensure proper conduct of business

oversight and detection of business trends and risks impacting the Centre, many initiatives have begun and improvements been made to ensure that the DFSA’s risk-based regulation can respond in a way best suited to changing circumstances. An example of this was the establishment of a Special Surveillance Unit in 2009 to capture, understand and respond better to regulatory risks. This work is especially important during times of financial turmoil as the nature of business and risk changes.

Over the years, a number of policy programmes have been implemented by the DFSA, including new rules to open the DIFC to retail clients; overhauling funds management rules; introducing new prudential requirements for Islamic finance products; and further strengthening the anti-money laundering regime.

Some of these initiatives were deregulatory in nature while others imposed additional compliance requirements. All of these reflect the DFSA’s policy commitment to the careful assessment of risk and the implementation of effective and proportionate regulatory responses.

As part of the DFSA’s response to the global financial crisis, and to reflect the profile of supervised firms, the DFSA has introduced an annual controls questionnaire, to be completed by all Category 4 firms. The questionnaire asks for a self-evaluation in aspects of management and control within a firm that the DFSA views as critical. As such, the questionnaire assists a firm to identify action that it may need to take to meet regulatory requirements. The questionnaire also enhances the DFSA’s efficiency in allocating supervisory resources. The first questionnaire was issued in June, and firms have been selected for visits based on the responses received.

The DFSA implemented a new suite of application forms in 2009.

The forms aim to be focused on risk and aligned to the DFSA’s approach to risk tolerance. A notes booklet for applicants was also introduced which now provides helpful information for applicants.

The forms have been well received by applicants and their advisers.

Additionally, a new risk assessment matrix in assessing applications was implemented in 2009.

Dubai

who enjoy Dubai’s high quality of life, open and welcoming culture and vibrant lifestyle.

Dubai

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IFC Review • 2010

In response to market developments, the DFSA has heightened its due diligence in relation to business viability, financial projections and competence and capability in senior management. The paramount aim is to make the right regulatory decision.

The nature of applications received in 2009 has evolved with more applicants originating from the Gulf Cooperation Council (GCC) states and being ‘start-up’ in nature.

The DFSA has seen an increasing trend toward changes of control, perhaps reflecting the current market conditions, where a significant or majority change in controller is anticipated, such that would give the proposed new controller a dominating influence over the future and direction of the Firm. Firms are reminded that the DFSA sees this as tantamount to the same level of regulatory due diligence as applied at the authorisation stage. Accordingly, the proposed controller will have to demonstrate to the DFSA that it is fit and proper to hold the financial services licence. These same high standards apply whether the proposed new controller is an individual or a corporate entity. Some of the key considerations: • material changes to the firm’s regulatory business plan: strategic vision and rationale; • financial resources: capital adequacy (independently assessed) and source of funds; • risk management and compliance; • controllers and close links; • corporate governance, composition of board and authorised individuals; • anti-money laundering and counter terrorist financing policies; and • transitional arrangements, for example, a change of name and impact on any service level agreements.

The DFSA has placed particular emphasis on contributing to regional dialogue and cooperation with other regulators and industry players through active participation in forums, seminars and conferences.

This has helped position the DFSA as an industry and its Executives as leaders and opinion formers.

Formalising regional cooperation and exchanging regulatory information with DFSA’s counterparts in the Middle East has been given high priority and will continue to receive it going forward. Traditionally, this has been brought about by way of formal

bi-lateral regulatory protocols in the form of Memoranda of Understanding (MOU). In February 2009, the DFSA was pleased to sign an MOU with the Central Bank of the UAE, thereby enhancing and defining earlier informal meetings. This agreement to enhance cooperation and coordination marked a strengthening of the quality of regulatory standards, reinforced a commitment to ensuring financial stability and provided regulatory support to promoting sound economic growth in the region.

This MOU with the Central Bank followed a similar arrangement with the federal securities regulator, the Emirates Securities and Commodities Authority (SCA) and, as the DFSA’s 10th regional MOU, confirmed the priority it has given to cooperating with its peers in the GCC. In 2006, the DFSA became the first financial services regulator in the GCC to become a signatory to the International Organisation of Securities Commissions (IOSCO) multi-lateral Memorandum of Understanding (MMOU).

This MMOU set the highest international standards for information sharing and assistance among securities regulators. It was followed in 2008 by the DFSA becoming a signatory to the BOCA Declaration, the agreement on cooperation and supervision of International Futures Markets and Clearing Organisations.

Further, the DFSA entered into an historic MOU in 2007 with the four federal agencies principally responsible for banking supervision in the United States – the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision.

Today, the DFSA has expanded its international network of regulatory cooperation by signing 46 bi-lateral Memoranda of Understanding with regulators of strategic importance to the DIFC, including the UAE, the United Kingdom (UK), China, Germany, France, Singapore, Hong Kong, Malaysia and India, for example.

For some years, the DFSA has been committed to supporting the work and objectives of international standard-setting bodies and, given the increasing global significance of these organisations for financial services,

the DFSA extended its engagement in 2009. Apart from its continuing participation in the work of IOSCO, the International Association of Insurance Supervisors (IAIS) and the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the DFSA is also an active member of the Islamic Financial Services Board (IFSB) and the International Forum of Independent Audit Regulators (IFIAR). In October 2009, at the invitation of the Chairman of the Basel Committee on Banking Supervision, the DFSA joined the Basel Consulting Group (BCBS), the BCBS’s main body for cooperation with a wider group of jurisdictions. These memberships ensure that the DFSA not only remains abreast of international standards, but makes a contribution to the developments of these benchmarks. In October 2010, the DFSA will host the 17th Annual Conference of the IAIS in Dubai.

To assure the future for high standard regulation in the Middle East, it is critical that adequate training and career opportunities be provided for nationals. The DFSA’s Tomorrow’s Regulatory Leaders (TRL) programme is a training and developmental initiative designed by the DFSA to create sustainable career opportunities for Emiratis in financial services regulation.

Launched in 2006, the TRL programme has attracted outstanding young Emiratis and will remain a strategic priority for the DFSA. The DFSA no longer claims to be a new Authority in the making. It has entered an era of growth and change and the Centre has moved away from ‘set-up’ mode to a more mature and sophisticated marketplace. The business of carefully scrutinising firms in this new economic environment has become even more critical. Enhancing effectiveness and efficiency as well as targeting resources has enabled the DFSA to continue to react effectively and swiftly to the challenges posed in the coming years.

In November 2009, the DFSA celebrated the fifth anniversary of its formation as an independent statutory authority. In that time, the DFSA has established a recognised and credible track record of regulation and has sought to build international confidence in the DFSA and in the regulatory standards that it administers. www.ifcreview.com/Dubai

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IFC Review • 2010

The DIFC Courts were established in December 2004 as courts of the Emirate of Dubai under laws enacted

by The Late His Highness Sheikh Maktoum bin Rashid Al Maktoum, Ruler of Dubai. Although a Court of the UAE, the DIFC Courts differ from the other courts in the country in a number of ways, including operating in the English language; using common law principles; only dealing with civil and commercial cases; and having a jurisdiction limited to disputes that involve the business community within the DIFC. Actively hearing cases since their inception, the DIFC Courts have firmly established themselves as a highly valuable component of the legal landscape in Dubai in a relatively short space of time, proudly complimenting and supporting the UAE justice system.

Through unfailingly upholding the principles of fairness and impartiality, and by consistently dispensing equal justice, the DIFC Courts have developed a reputation for operating to the highest international standards of legal procedure, providing the certainty, flexibility and efficiency expected by the global institutions operating within the DIFC. As an international financial centre, the DIFC has established a body of commercial and civil laws based on the best from financial centres around the world, melded to suit the needs of the DIFC and its community. Of course such a legal framework is only as strong as the Courts that uphold it, and this is why the DIFC Courts are such a critical part of the DIFC’s value proposition, acting independently from the DFSA and DIFC Authority and with the ability to review the Authority and Regulator’s rulings when required.

The DIFC Courts are now recognised as an innovator amongst regional Courts, having implemented a number of initiatives to enhance the legal offering in the region.

These initiatives include a number of milestones, such as the adoption of a world-class electronic case management system to further improve the case hearing capabilities of the Courts; and the creation of a pro bono scheme to allow individuals who cannot afford a lawyer the ability to seek free advice from lawyers registered with the DIFC Courts.

Another important development www.ifcreview.com/Dubai

for the DIFC Courts was the establishment of a Small Claims Tribunal, to hear cases where the value of the claim is less than AED100,000. The Small Claims Tribunal, which resolves 90 per cent of its cases in under three weeks, is available to any company or individual operating within the DIFC and plays an important role in promoting the creation of a Small and Medium Enterprise (SME) -friendly culture. The DIFC Courts foster an enabling legal and judicial environment that is conducive to trade, finance and investment and have taken great strides in the past 12 months to become one of the leading judicial systems in the region.

In synergy with the pace and nature of business in an international financial centre, the Courts have put in place arrangements to support accessible, swift and efficient justice, such as the Urgent Application facility.

This offers 24 hours a day, seven days a week access to justice through a dedicated emergency phone number.

Court room technology allows for judges and witnesses to contribute to hearings live from locations anywhere in the world and the Courts’ case management system, implemented in 2008, enables access to a complete archive of all case papers, live in the Court room. In 2009, the DIFC Courts signed a protocol with the Dubai Courts, setting out the mechanism for the enforcement of each other’s orders and judgments and further reinforcing cooperation between the two Courts.

To ensure that litigation conducted by lawyers is to the highest professional standards, the DIFC Courts have recently implemented a Professional Code of Conduct to which all of its registered lawyers must adhere. This is the first Code of its kind in the region and it has been well received by the UAE’s legal community, an example of the DIFC Courts, and indeed the UAE’s desire to further the accessibility and transparency of justice in the country. As mentioned previously, the pro bono scheme established in October further promotes access to justice for those without the financial resources to afford legal representation. Again, this has been adopted well by the UAE’s legal sector, which has been quick to sign

up to offering free advice.

These best in class systems support advanced enforcement of DIFC law alongside an experienced network of judges, which comprises a bench of eight with over 130 years combined judicial experience, spanning three continents and all areas of commercial dispute resolution. Led by Chief Justice Sir Anthony Evans, former High Court Judge and Lord Justice of Appeal in England and Wales, the DIFC Courts were the first in the region to have a female judge on their bench. They also proudly boast two resident, common law, Emirati judges; yet another significant achievement for the Courts and the UAE. One of the overriding principles of the DIFC Courts is to promote settlement. Of approximately 150 grievances bought to them over the past 18 months, around 90 per cent have been resolved outside of a trial, saving the Centre’s community millions of Dirhams and hundreds of hours of senior management time. When disputes within the Centre do make it to a formal hearing, efficiency saves the Centre’s businesses further time and money, through a commitment to swift and economical litigation practices at every step.

Since handing down our first judgment, the DIFC Courts have built a strong reputation for excellence among the international legal community. It has an experienced and dedicated team, confirmed at the 2009 DIFC Governor’s Awards where the Courts Registrar won the DIFC’s Distinguished New Employee of the Year Award. The Courts were also shortlisted for Distinguished Project of the Year and Distinguished Department of the Year, in recognition of its achievements to date.

Going forward, the Courts remain committed to continuous and meaningful development in support of the DIFC community.

Collaborating with other courts is a key focus, and they have been actively working with their peers in the UAE and beyond to learn and develop. The DIFC Courts understand their role in supporting business in the DIFC and intend to continue developing their world-class judicial system to serve the needs of the community and justice.

Dubai

The DIFC Courts

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Gibraltar

IFC Review • 2010

Gibraltar: Unshaken by the Storm

by Adrian Pilcher, Senior Associate, Isolas, Gibraltar

2

009 BEGAN ON A HIGH NOTE

for Gibraltar as an international finance centre after the European Court of First Instance (the Court), in a judgment delivered on 18 December 2008, annulled the European Commission’s decision that Gibraltar’s proposed reform to its corporate tax system constituted unlawful state aid.

In August 2002, the United Kingdom (UK) notified the Commission of Gibraltar’s proposed corporate tax reform. That reform included in particular the repeal of the former tax system and the imposition of three taxes applicable to all Gibraltar companies, namely a registration fee, a payroll tax and a business property occupation tax (BPOT), with a cap on liability to payroll tax and BPOT of 15 per cent of profits.

In 2004, following a formal investigative procedure, the Commission decided that the proposed system constituted a scheme of state aid that was incompatible with the common market and accordingly could not be implemented.

In its decision, the Commission found that the reform was regionally selective (since it provided for a system under which companies in Gibraltar would be taxed, in general, at a lower rate than those in the UK) and that some aspects of the reform were materially selective (ie that certain measures within the tax regime derogate from that common regime and thereby differentiate between economic operators who are in a comparable factual and legal situation).

In brief, the Court held that Gibraltar had institutional, procedural, economic and financial autonomy, and that, accordingly, no comparison could be made between the tax system applicable to companies established in Gibraltar and that applicable to companies established in the UK for the purpose of establishing a selective advantage favouring the former.

As regards material selectivity, the Court

found that, since the Commission had second half of the tax year 2010/11 (ie 1 not begun by identifying the common or January 2011 to 30 June 2011) will be ‘normal’ regime under the proposed tax 10 per cent; system, it was impossible for it to have • upon the introduction of the 10 per established that certain of the elements cent rate on 1 January 2011, energy of that system were selective vis-à-vis the and utility providers will pay a 10 per common or ‘normal’ regime. The Court cent surcharge and will thus suffer a therefore found that the Commission had rate of 20 per cent. These will include imposed its own logic as to the content electricity, fuel, telephone service and and operation of the proposed tax system. water providers; On the basis of the above, the Court • with effect from 1 July 2009, a ‘start up’ rate annulled the Commission decision, and of 10 per cent will apply to any business although the Court of First Instance’s established in Gibraltar after 1 July 2009. decision is currently being appealed, Tax will be assessed in an actual year basis as the judgment nevertheless bodes well opposed to a preceding year basis (this will for Gibraltar’s future, and signifies the apply to all companies as from 1 January acceptance by the European Union (EU) 2011). As an anti-avoidance provision, of Gibraltar’s institutional, procedural and however, the ‘start up’ rate will not apply economic autonomy, and its consequential in respect of any commercial activity right to pass its own tax laws. being carried out before 25 June 2009 and On another positive note, the which is reorganised by the taxpayer in the uncertainty about the future of Gibraltar’s name of a different entity for the purpose corporate tax rate finally came to an end of benefiting from the start up scheme. on 25 June 2009 when the Government The scheme will also be available, on made the following announcements: certain conditions, to businesses that have • the standard rate of Gibraltar corporation been recently established. The conditions tax has been reduced from 27 per cent to are as follows: 22 per cent, although a small company • the business must have commenced rate of 20 per cent applies where the after 1 July 2007; profits of an accounting period are • the company must agree to be taxed less than GBP35,000, and a marginal on a preceding year basis, and not on rate is charged on profits of between an actual year basis in the context of GBP35,000 and GBP43,333 (a ‘small commencement provisions; company’ is one whose trading activity • the first tax year for which the in any year has a minimum of 80 per company will be liable is 2008/2009, cent of its total trading receipts derived and tax will be payable in respect of from sources other than dividends, this period at the rate of 27 per cent; interest or discounts, rents, royalties, • in the tax year 2009/2010 the premiums and any other profits arising applicable tax rate will be 10 per cent. from property); • the Exempt Status Tax Regime (whereby • the ‘low rate’ announced in their 2007 companies holding an exemption budget speech will be 10 per cent. The certificate pay zero tax) must end by 31 effective date for this rate will be 1 December 2010. Most Exempt Status January 2011. This means that the rate companies currently hold exemption applicable to the first half of the tax year certificates that are valid, subject to (ie 1 July 2010 to 31 December 2011) repeal of the legislation, for 25 years. will be 22 per cent (or the applicable It was confirmed this year that this will rate at the time if it is further reduced occur at midnight on 31 December 2010 next year), and the rate applicable to the by means of a repeal of the Companies www.ifcreview.com/Gibraltar

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IFC Review • 2010

www.ifcreview.com/Gibraltar

and Austria, who as full members of the OECD had not yet themselves accepted the tax information exchange principle, did so. Accordingly, in April 2009 the Government declared a 20 November target date to sign at least 12 agreements and pass to the white list. By 20 November they had in fact signed 13 TIEAs. At its most recent meeting, the G20 gave notice that it was not just a matter of signing 12 agreements, but also of who the agreements were entered into with. Countries that had sought to reach the number quickly by signing TIEAs with other less economically relevant countries would face new difficulties. In this respect, Gibraltar is well placed since they have focused on signing up with the principal countries of the OECD. The Government of Gibraltar has declared that for Gibraltar this is not simply a ‘numbers game’, and that Gibraltar is committed to the underlying principles of the commitments that they have given. Therefore, in addition to the 13 signed agreements, Gibraltar has already negotiated and initialed several more, which will be signed when the corresponding countries complete their internal constitutional procedures for

doing so. The Government has further confirmed that its offer to sign a TIEA with whatever country wants to sign one with Gibraltar remains open.

The Government will shortly be publishing a Bill for an Act of the Gibraltar Parliament to put the agreements into practice. The Act is expected to be law by the end of 2009.

Over the last year, the combined effect of the global recession and the credit crunch has fuelled a very significant reduction in consumer demand and in investment, and thus economic activity in almost all sectors of the global economy has suffered, which in turn has caused a huge rise in job losses and unemployment around the world, and the sharp deterioration of public finances for most governments. In Gibraltar, this has not been the case. Even though Gibraltar is not immune to what is happening elsewhere, its economy has in fact continued to grow at a healthy rate and the number of jobs in its economy has continued to grow to record levels.

The prospects for Gibraltar’s economy, both in the short and the long term, remain very sound and stable.

Gibraltar

(Taxation and Concessions) Act; • the minimum amount of tax that High Net-Worth Individuals and Category Two Individuals must pay has increased from GBP18,000 to GBP20,000, and the maximum amount of their income on which they pay tax increases from GBP60,000 to GBP70,000. Both changes took effect as from 1 July 2009.

Another noteworthy development in 2009 has been Gibraltar’s signing of 13 tax information exchange agreements (TIEAs), which has seen it transferred by the Organisation of Economic Cooperation and Development (OECD) on to its ‘white list’. To date, Gibraltar has signed TIEAs with the following countries: United States of America; Ireland; Germany; New Zealand; Australia; UK; Denmark; Austria; France; Portugal; Finland; Greenland; Faroe Islands.

Like most countries, and in order to avoid discrimination against its own Finance Centre, Gibraltar first waited for the establishment of a level playing field before actively seeking out partner countries with which to sign such agreements. This was achieved in March when Switzerland, Luxembourg

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IFC Review • 2010

Gibraltar

Gibraltar - Fact File GENERAL OVERVIEW

Location

Time zone Population Capital Airport(s) Language Official language Currency Political system International dialling code Legal system Centre’s expertise

European Union (self-governing British Overseas Territory; joined EU with UK in 1973); located at entrance to Mediterranean; not an island.

Greenwich Mean Time +1.

30,000.

Gibraltar.

Gibraltar.

English; Spanish also widely spoken.

Pound sterling; Gibraltar pounds are issued at par.

Parliamentary democracy. +350.

English law as varied by local statute.

Funds, including experienced investor funds, trusts, insurance and reinsurance, captives, protected cell companies, wealth management.

TAX

Personal income tax

Corporate income tax

Exchange restrictions Tax information exchange agreements

Choice between allowance based (17-40%) and gross income based (up to £25,000: 20%; £25,001-£100,000: 29%; over £100,000: 35%); special tax residence schemes for high net-worth individuals and high executives possessing specialist skills.

22% (20% for small companies); low flat rate of 10% for all companies incorporated after 1st July 2009 ie all new companies; 10% low flat rate for all companies (whether incorporated before or after 1st July 2009) as from 1st January 2011.

None.

For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies Minimum authorised capital Minimum share issue

All major currencies.

No specific minimum.

One.

TYPE OF ENTITY

Shelf companies Timescale for new entities Incorporation fees Annual fees

Yes. Three days; same day if urgent. £50 (£100 for urgent incorporation).

Annual return: £45; filing of accounts: £10; filing of particulars of directors or secretaries: £10.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

Private company: one but a minimum of two is advisable; public company: seven.

None.

Yes. Any location; once a year.

SHAREHOLDERS

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Yes. Share warrants to bearer are permitted but these are required to be immobilised.

One. Companies house.

Once a year; any location.

Annual return Audit requirements

Yes. Yes; certain derogations for small and medium-sized companies.

ACCOUNTS

OTHER

Registered office Domicile issues Company naming restrictions

Yes. Yes. www.ifcreview.com/Gibraltar

93

IFC Review • 2010

Guernsey

Key Developments in Guernsey Over the Last Year

by Paul Christopher, Partner, Ozannes, Guernsey

“

WE HAVE A SAYING IN CHINA –

hearing 100 times is not as good as seeing it once. I’ve learnt a lot,” said Her Excellency Madam Fu Ying, Chinese Ambassador to the United Kingdom (UK) when she visited Guernsey in November 2009. An offer remains open to all of those who wish to understand more about Guernsey. It is now without question that offshore centres are firmly placed high on the international political agenda and Guernsey will seek to engage proactively at an international level with the proposed opening of a representative office in Brussels.

January

On 6 January 2009, the Guernsey Financial Services Commission (the Commission) published on its website a report, led by Michael Foot, into the circumstances leading to the rescue of Northern Rock (Guernsey) Limited and the placing of Landsbanki Guernsey into administration. The report concluded that the Commission measured up to good practice and that their actions were wholly justifiable having regard to the facts known at the time and what could reasonably be foreseen. The report highlighted two important issues for banks in small jurisdictions and their regulators: 1. In the past, small retail depositors www.ifcreview.com/Guernsey

were seen to bear at least some risk and apparently the expectation now is that they should no longer bear any risk, however remote. Whilst the introduction of the depositor compensation scheme addresses part of this expectation, new supervisory standards need to be adopted internationally; 2. Cooperation and information exchange between regulators is absolutely critical, particularly when a crisis occurs. The global assistant cooperation is not working well at present.

It should be noted that Guernsey now has a depositor compensation scheme in place.

February

In February, Guernsey received a top credit rating from Standard & Poor’s when Guernsey was assigned ‘AAA’ long-term and ‘A+1’ shortterm sovereign credit ratings. This placed Guernsey in the top 25 of more than 120 rated jurisdictions in the world, ahead of many competitor international finance centres and on a par with much larger onshore jurisdictions. Standards & Poor’s said that the ratings reflected “a very robust fiscal position, based on sound fiscal policies”. There was a recognition of the challenge to the Island’s finances

Guernsey

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IFC Review • 2010

in the short-term by the introduction of the zero-ten tax package and subdued economic activity. However, it expects Guernsey’s financial position to be maintained over the medium-term. More on the zero-ten tax package below.

March

In March 2009, Lord Hunt was commissioned by the Island’s Commerce and Employment Department to conduct a strategic review of Guernsey’s banking industry to help develop a sustainable strategy for the future of the sector in response to the global economic situation and its effect on Guernsey and the banking sector in particular. During the investigations and interviews undertaken by the team, Lord Hunt stated that he found much to encourage him in thinking that Guernsey could expect a major contribution to its economy from banking for years to come.

The independent report, ‘Success and Stability: A Strategic Review of Guernsey’s Banking Industry’, was published in November and highlighted that there were definite opportunities to be researched and potentially exploited by the Guernsey banking sector but that the Island could not afford to be complacent. The report highlights threats and risks to be mitigated as well as opportunities which must be addressed by the public and private sector in order to remain competitive.

In addition to providing traditional banking services to the local, domestic and business community, the report identified that most Guernsey banks offer core products to all other parts of the finance sector and that this also added to Guernsey’s infrastructure and general offering.

Private banking and the provision of all professional services, including banking, to the world’s wealthy families, wherever they live, was identified as an opportunity for Guernsey. The relocation of wealthy individuals to Guernsey who may bring part of their business to Guernsey was also identified as an opportunity.

April

It was at the start of April 2009 that, following the G20 summit in London,

Guernsey welcomed its ‘white-listing’ by the OECD. The inclusion of the Island on a white-list with some of the world’s top financial centres cemented Guernsey’s position as an internationally compliant and transparent low tax jurisdiction.

Up until that point, Guernsey had signed 13 tax information exchange agreements (TIEAs) and has signed more since as an indication of its commitment to international recognition. As well as entering into TIEAs, there have been various double taxation agreements entered into with the following countries: Netherlands; Nordic countries; UK; Ireland; New Zealand; Australia.

In April 2009, the Commission, in conjunction with the working party representative of practitioners across the investment industry, took for consultation a new conduct of business rules for all entities licensed under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended. The Conduct of Business Rules, which represented the first, and major, part of a process to replace the Licensees (Financial Resources, Notification, Conduct of Business and Compliance) Rules, 1998 and the Collective Investment Schemes (Designated Persons) Rules, 1988, was the end product. The second and final part of the process is the revision of the Capital Adequacy Rules which were released for consultation at the end of November 2009.

October

Guernsey introduced its zero-ten corporate tax regime in 2008 in response to changing international standards in tax policy. The tax exempt regime was maintained for investment funds and their subsidiaries. The Island’s government resolved at the time of the introduction of the new regime that this would be a two-stage process and that a review of the effects of zero-ten would be undertaken. It also recognised the Island’s own need to raise tax revenues might require changes to the tax regime.

As a result of the global economic developments and feedback from the European Union (EU) Code of Conduct Group, the Crown Dependencies (Guernsey, Jersey and the Isle of Man) are required to review their corporate tax regimes sooner than originally anticipated.

With that backdrop in mind, the States of Guernsey passed a resolution on 27 October 2009 to include in its final review the current corporate income tax review. Under the current regime the general rate is zero per cent. This rate does not apply to investment funds as they are exempt from corporate income tax altogether on making an appropriate election.

The review is in its preliminary stage at present and it is therefore too early to ascertain its outcome. Guernsey will be working with the UK and the EU Code of Conduct Group and the other Crown Dependencies towards a common end. While the outcome of the review is not yet known, Guernsey intends and expects to retain its exempt regime for investment funds.

Until such time that the planned review is completed, the existing zero-ten corporate income tax and tax exempt fund regime will remain in place. It is unlikely the changes to the current regime will be brought into effect until 2012 at the earliest.

In December 2008, the UK Government announced that Michael Foot would lead the independent review of British offshore financial centres announced at the prebudget report 2008. The review was designed to look at the immediate and long-term challenges facing British offshore financial centres in the current economic climate.

The final report of Michael Foot’s review of the opportunities and challenges facing the British Crown Dependencies and the six Overseas Territories (Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Turks and Caicos Islands) was published on 29 October 2009.

The report was broadly welcomed in Guernsey as recognising the well-regulated and cooperative jurisdiction which Guernsey is, with a sound and diverse economy able to cope with and adjust to global economic crises.

It also confirmed that Guernsey provided a positive economic benefit to the UK. There were a number of issues which the review suggested be considered by all of the British offshore centres including a potential ombudsman scheme.

November

In November 2009, following a www.ifcreview.com/Guernsey

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IFC Review • 2010

source income.

The tax cap on non-Guernsey source income has now been reduced to GBP100,000. Just as importantly, an option to cap the total tax liability arising from worldwide income has been introduced at GBP200,000 starting with the year of charge 2009.

The impact of this is that no Guernsey resident individual can pay more than GBP200,000 maximum tax in Guernsey each year.

In relation to the taxation of ‘resident only’ individuals there is a new legislation where individuals either: • pay Guernsey tax on a worldwide income; or • elect to pay an annual ‘standard charge’ of GBP25,000 plus tax on Guernsey source income (excluding bank interest) – with the proviso that the standard charge is available for offset against the tax liability arising on Guernsey source income. ‘Resident only’ individuals will need to analyse their worldwide income to determine whether the election is advantageous based on their individual circumstances.

With effect from 30 November 2009, the Channel Islands Stock Exchange (the CISX) became the first exchange to provide transaction settlement at Euroclear UK and Ireland for openended investment companies (OEICs).

The CISX has been trading OEICs since March 2005, and now offers listed issuers in Guernsey OEIC transaction settlement at Euroclear UK and Ireland for transactions on or outside dealing days. It is hoped that this new facility will add to the CISX’s appeal to fund managers and investors alike, as it will enable investors to redeem and subscribe for shares electronically on or outside normal dealing days. The move should enhance the efficiency of the settlement process for investors to bring new opportunities both at the CISX and for Guernsey and is of particular significance for securities with monthly or less frequent dealing days.

Likewise it is hoped that the CISX’s clients will see processing costs decline and written errors associated with manual transaction processing substantially reduced as a result of the electronic settlement of OEIC transactions.

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GUERNSEY

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LONDON

Guernsey

number of delegations from Guernsey to China as noted above, the Chinese Ambassador to the UK visited Guernsey. In particular she noted the innovative decision to establish a representative office in Shanghai for Guernsey Finance. She also offered Guernsey the use of the Chinese Embassy in London for assistance in future projects.

Also in November, two significant amendments were made to the income tax law in Guernsey reducing the tax cap and extending it to local income and changing the basis of taxation of ‘resident only’ individuals.

The aim of the ‘tax cap’ is to attract high net-worth individuals to establish themselves and their business interests in Guernsey. When it was originally introduced on 1 January 2008, the tax cap was set at GBP250,000 and covered non-Guernsey income only: Guernsey source income remained chargeable in full. It was agreed following a review of similar tax caps in other financial centres and after a period of consultation that the level of the tax cap should be reduced and the scope widened to encompass local

Guernsey

96

IFC Review • 2010

Guernsey - Fact File GENERAL OVERVIEW

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Channel Islands.

Greenwich Mean Time + 1 in summer.

60,000.

St Peter Port.

Guernsey.

English.

Pound sterling.

Democracy with a unicameral parliament. +44 1481.

Guernsey has its own legal system – common law with statues.

Investment funds, captive insurance, fiduciary and banking.

TAX

Personal income tax

Corporate income tax

Exchange restrictions

Tax information exchange agreements

20%.

0% as standard, except banks which are levied at 10% on their regulated business.

Investment funds can still apply to be exempt companies.

None.

For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies Minimum authorised capital Minimum share issue

Any. None.

One.

TYPE OF ENTITY

Shelf companies

Timescale for new entities

Incorporation fees

Annual fees

No but standard memorandum and articles of association available.

One day maximum.

Fee dependent on speed of incorporation, starting at £100.

Annual validation fee dependent on type of company, generally starting from £250.

Where applicable, continuing tax exempt fee £600.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

One. No, as a matter of corporate law. Regulated businesses will require resident directors.

Yes. None.

SHAREHOLDERS

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Yes, but beneficial ownership not publicly available.

No. One. No. Not required (subject to redemption being passed).

Annual return Audit requirements

No annual submission of accounts required.

Various exemptions, but not for regulated businesses.

ACCOUNTS

OTHER

Registered office Domicile issues Company naming restrictions

Yes. None.

Yes.

www.ifcreview.com/Guernsey

97

IFC Review • 2010

Hong Kong

Overview of Hong Kong 2009 & 2010

by Michael Olesnicky, Baker & McKenzie, Hong Kong

T

HE BIG BUZZ IN THE WEALTH MANAGEMENT INDUSTRY

around the world has been the growing attempts by governments to obtain information about their taxpayers who might be holding undeclared funds abroad. Switzerland and Liechtenstein have been obvious targets for these attacks, but it is inevitable that other havens will be under increasing pressure to disclose taxpayer information to foreign tax authorities.

Hong Kong was lucky to avoid being named on the Organisation for Economic Cooperation and Development’s (OECD) ‘shame’ list, but clearly does not wish to be put on susbsequent lists and does not want to be exposed to economic, tax and other sanctions from its major investment and trading partners. As a result, along with many other jurisdictions, the Hong Kong government has taken active steps to introduce a regime to allow for exchange of information between tax authorities.

It is starting from a zero base.

None of Hong Kong’s five existing comprehensive tax treaties permit exchange of taxpayer information to anywhere near the extent that the prevailing OECD standard requires.

The exchange provisions in these treaties are modelled on the 1985 OECD exchange of information provision, which is far removed from the current 2005 version.

One reason for this is that the Hong Kong tax authorities do not have the legislative power to gather and exchange information that they do not require for Hong Kong’s own domestic tax purposes. As an example, Hong Kong does not tax bank deposit interest, and therefore the Hong Kong tax authorities have www.ifcreview.com/HongKong

no power to collect information about bank deposit interest earned by United States (US), British and other taxpayers on their Hong Kong bank accounts.

As a result of the new international environment, however, the government has introduced appropriate legislation, which is likely to become effective in early 2010.

Of course, this leaves Hong Kong with the task of putting into place at least a dozen or so tax treaties to provide for comprehensive exchange of information.

There is another dynamic in play here. The Hong Kong government also wants Hong Kong to have a series of comprehensive double tax agreements with its major investment and trading partners to make Hong Kong a more attractive investment environment, to encourage the establishment of regional headquarters operations and to facilitate Hong Kong companies who invest and carry on business in other countries.

Truthfully, Hong Kong has little to offer to other countries to induce them to enter into comprehensive tax treaties because it does not impose withholding taxes on dividends and interest; the normal withholding rate on royalties is already very low (4.95per cent); and the threshold for taxability in Hong Kong is already (arguably) higher than the normal tax treaty ‘permanent establishment’ standard.

The only thing that Hong Kong can offer as a trade for a comprehensive tax treaty is exchange of information. It is perhaps for this reason that the new legislation has been drafted to ensure that Hong Kong can only exchange information under a comprehensive double tax treaty, but not under a stand alone tax information exchange agreement. Hong Kong does not want

tax treaties. It may bring its subsidiaries to the market, and equally may seek a listing of its own. Once authorised, the Sicar is a lightly regulated vehicle. A custodian bank is a requirement.

The SIF is restricted to “wellinformed” investors (over €125,000), IFC Review • 2010 is subject to a certain ‘spread of risk’, is easily administered, and has ‘lighttouch’ regulation.

Private Trust Company Services

The Sicar Venture Capital Vehicle

Luxembourg’s capital vehicle Luxembourg Residence of years before in weLuxembourg see a more moderna stand-alone venture agreement because it even giving theTrust taxpayer a right to A Luxembourg tends to be Since 1 January, with abolition came into JuneKong 2004.a quid pro corporate law2006, regime in the place in would notbeing give in Hong review and amend Trust the information to a style fiduciary contract. It is used mainly for Hong of the wealth Luxembourg Venture capital much needed in the be Kong.

On tax, the trusts side, the has quo.

Thus, the ismessage from Hong provided.

IPG LIMITED capital market instruments and portfolios. suddenly become an attractive choice of European Unionwe andwill theoretically the Kong is clear: give you the In particular, the government hasADMINISTRATION government consultation programme By adopting trust law, Luxembourg for wealthy within Sicar is a tax-attractive vehicle.

In actual hasresidence ended but there is individuals yet no word information, but you need to give us a indicated that a information exchange recognised the Hague fact it has been tax slowtreaty to take off, and is will to how a government will respond comprehensive in return. be conducted onlyConvention on a case-on as Europe. to theLuxembourg various submissions haveto the The strategy mightby already be working. specific basis. It is not proposed to the international recognition of trusts. can now bethat added subject to approval the Luxembourg IPG Administration (IPGA) is a licensed provider of services to Bahamian incorporated Private been made to it.

It is expected that, In anticipation of the legislation, Hong allow for any automatic or wholesale Normally in Luxembourg, only banks likes of Monaco, Belgium, Switzerland, Regulator (CSSF).

Trust Companies.

Weassupport families and their professional in the establishment Kong has already commenced information.

A notable in the dueUnited course, Hong Kong will have and their of equivalent institutions may actadvisors Kingdom, and Ireland, and, in There is still a learning curve tonew the exchange and operation of PTC structures.

Our service is bespoke, client-driven and confidential. negotiations with Netherlands, Ireland, point is that only information about a modern trusts law system as trustees. Trustees act for bond issues some respects, Luxembourg may(the become definitions of venture capital. A Sicar United assets Kingdom and to other taxes that are specifically covered consensus being to that new law will and securitisations.

From a Luxembourg an alternative thethe recently announced acquires in order sell major them, those jurisdictions.

A draft tax treaty with treaty be instrument exchanged, – notUnited containKingdom many ofnon-domiciled the more exoticrules.

Services offered include: point aoftax view, thewill trust whereas a holding company tends to under France has already been initialled. It is rather than help aboutfor all taxes as provided that are some is a great holding assets off provisions Luxembourg alsofound has a in final tax on keep its assets. a Any brave“well-informed” world. Hongmember Kong is of stillthe a for in the existing OECD standard. other jurisdictions).

•new Incorporation balance sheet. savings interest of 10 per cent, which is long way away goal (The author is somewhat sceptical that Regretfully, has been no • Registered Office / her Agent not added to there other income. public may investfrom in aachieving Sicar.

• Bahamas Registered Representative of having in place a full range of double this restriction will be applied, in view indication so far as to whether tax Specialised Investment Funds (SIF) A “well-informed” investor is someone • Directors & Officers (including tax treaties, but that journey has begun. of Special the clearDirector) provisions of the OECD exemptions will be clarified to ensure This vehicle came into effect in 2007, Summary who invests a minimum of €125,000 • Secretarial Services One would expect major countries to 2005 standard on this issue.) Finally, a that trusts managed in Hong Kong Luxembourg continues and has proved to be a very attractive and orhave delivers a certificate from a credit Administration a •reciprocal interest in obtaining foreign tax administration that requests willIndeed, not attract tax liability eitherto be an important investment fund successful vehicle in the short time of its institution that he has the knowledge • Accounting information from Hong Kong and thus information must satisfy Hong Kong with respect to the trust fund centre. or Tel: +1 677 8700 It isrespect the headquarters of the biggest existence as an alternative to setting up and experience to understand the Hong Kong’s dream of a comprehensive that the information is ‘necessary’ or with to (242) the companies that steel Mittal, offshore. The annual for tax at 0.01 perout cent arecompany risks Fax: in +1the (242) 677 Arcelor 8701 tax involved. treaty network might be achieved ‘foreseeably relevant’ carrying administered byworld, trustees in Hong private banking continues to grow, on the net asset value is minimal.

The Sicar is subject to tax, but Limited the tax treaty or the administration or earlierIPG thanAdministration expected.

Kong. Unless the government is and the single premium insurance policies There is a minimum capital of with exemptions such as no dividend To P. secure the N-3924 passage of the legislation, enforcement of its domestic tax laws. prepared to take a holistic approach O. Box info@ipg-protector.com continue to remain attractive as a way of €1,250,000, which must be reached one withholding tax and no capital gains tax. the tax authorities have announced So-called ‘fishing expeditions’ will not that www.ipg-protector.com will cover trust, corporate and Nassau, The Bahamas N assets. year after formation.

The Sicar benefits Luxembourg’s safeguards that willfrom be imposed before be entertained. taxprotecting issues in one package, it is difficult information is made available to foreign In other news from Hong Kong, the to see how Hong Kong could become tax authorities, including the giving of reform of trust and corporate laws is attractive and improve on the clarity prior notification to the taxpayer and continuing. It will be at least a couple of Singapore’s laws in these regards.

Referral: The recommendation of a person or business to another.

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www.ifcreview.com/HongKong

47

The Bahamas

HongLuxembourg Kong

98

investor” is involved, there is very little orIFC regulation at all. In summary, the SV Review • 2009 is a tax-neutral vehicle, very much based on the concept of ‘spread of risk’.

99

IFC Review • 2010

GENERAL OVERVIEW

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Hong Kong.

GMT +8.

7,000,000.

Hong Kong.

Chek Lap Kok. Cantonese/English.

HK$.

Elected legislature. +852.

Common law.

Everything.

TAX

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

15% (max.).

16.5%.

None.

For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies Minimum authorised capital Minimum share issue

All. US$1.

US$1.

TYPE OF ENTITY

Shelf companies Timescale for new entities Incorporation fees Annual fees

Yes. Six working days.

US$220.

US$346.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

One. Nil. Yes (for private groups).

Nil.

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Listed companies only.

No. One. No. One per year.

Annual return Audit requirements

Yes. Yes.

SHAREHOLDERS

ACCOUNTS

OTHER

Registered office Domicile issues Company naming restrictions

www.ifcreview.com/HongKong

In Hong Kong.

Nil. Nothing significant (eg, there are restrictions on “Bank” or “Trust”)

Hong Kong

Hong Kong - Fact File

Ireland

100

IFC Review • 2010

Reform of Charity Law in Ireland

by Cormac Brennan, McCann FitzGerald Solicitors, Dublin

Introduction

This article outlines the principal features of the Charities Act 2009 (the Act) and the practical implications of the Act for charities and other not-for-profit organisations operating in Ireland.

The Act will bring about fundamental changes to the regulation of all charitable organisations operating or carrying on activities in Ireland, including the establishment of both a Regulator of Charities (the Regulator) and a register of charities.

The Charities Sector in Ireland

It is estimated that there are almost 25,000 non-profit organisations operating in Ireland. This figure encompasses all nonprofit bodies (including, for example, some hospitals and education providers), but the majority are community and voluntary organisations.

It is difficult to determine the precise monetary value of the charities sector to the Irish economy, due to difficulties in defining the sector and also due to the absence of regulation in the sector to date.

However, while the definitional difficulties and a lack of data on the sector have limited the number of investigations into its economic value, it has been estimated that the economic value of the charities sector was in the region of EUR2.5 billion in the middle part of this decade, which is indicative of the substantial resources involved in the sector. Irish charities have not, however, escaped the effects of the global economic downturn and this figure may be subject to significant revision in the current environment.

Purpose of the Act

The purpose of the Act is essentially threefold, namely: • to enhance transparency and accountability in the charities sector;

• to increase public confidence in the charities sector; and • to protect against fraud.

In attempting to achieve these objectives, the Government has had to bear in mind that the overwhelming majority of charities in Ireland are small and are managed entirely by volunteers. The charities sector derives much of its dynamism from such small voluntary community groups and, clearly, inappropriate or excessive regulation could stifle the activities of those organisations. The challenge facing anyone attempting to draw up new legislation to regulate charities in Ireland was always going to be that of striking the appropriate balance between proper accountability and vigorous intervention where charitable status is being abused, and not placing an undue burden on small charities which would prevent them from being able to function.

The Act, together with the existing Charities Acts 1961 and 1973 and the Street and House to House Collections Act 1962, will provide a composite regulatory framework for charities through a combination of new legislative provisions and retention of existing charities legislation, updated where appropriate.

The Act was enacted on 28 February 2009, but rather than coming into force automatically it will be commenced in stages over time by Ministerial Order. The latest information available indicates that the lead-in period to full commencement of the Act could be up to two years from the date of enactment, with significant work to be undertaken in order to establish the Regulator and to introduce the secondary legislation required to implement the Act in full.

It is also unclear how the Regulator will be funded, and this poses a considerable obstacle for the Government in the www.ifcreview.com/Ireland

101

IFC Review • 2010

The Main Areas of Reform

Charitable Status and Charitable Purposes Charitable status under the Act will depend on an organisation having exclusively charitable purposes and conferring a public benefit, rather than having any particular legal form.

Charitable purposes are defined in the Act, for the first time in primary Irish legislation, as follows: • the prevention or relief of poverty or economic hardship; • the advancement of education; • the advancement of religion; or • any other purpose that is of benefit to the community.

This definition therefore provides a statutory footing to the existing common law definition of charitable purposes which derives from the well known Pemsel case1. The definition was provided by Lord MacNaghten in that case and is commonly known as the ‘MacNaghten Rules’.

The Act also provides a list of purposes that are to be included within the definition of ‘purposes of benefit to the community’. The list, which is not exhaustive, is designed to achieve clarity in relation to a number of recognised charitable purposes, and broadly reflects those already used by the Irish Revenue Commissioners in determining eligibility for certain tax exemptions for charities.

“Charity trustees” are defined in the Act essentially as those persons having day-to-day control of a charitable organisation. Where charities are companies, its directors and other officers are charity trustees. Trustees or other officers of unincorporated organisations are charity trustees in those circumstances.

Charitable Tax Exemption

The Act makes it clear that its provisions have no effect on the law relating to determining eligibility for tax exemption for charitable organisations, and the Revenue Commissioners are not bound by any determination of the Regulator as to whether a purpose is of public benefit or not. www.ifcreview.com/Ireland

Charities Regulator

A new Regulator of Charities will be established under the Act. The functions of the Regulator will include: • increasing public trust and confidence in the management and administration of charitable organisations; • promoting compliance by charity trustees with their duties in the control and management of charitable organisations; • ensuring the accountability of charitable organisations to donors, beneficiaries and the public; • establishing and maintaining a register of charitable organisations; • ensuring and monitoring compliance by charitable organisations with the legislation; and • carrying out investigations in accordance with the legislation.

The focus of the Charities Regulator is clear from the list of its functions, namely to promote public trust and confidence in charities and ensure accountability for charity trustees.

Register of Charities

There is currently no central public register of charities in Ireland, and there is therefore neither the obligation nor the possibility to be officially recognised or acknowledged as being a properly constituted charity.

One of the primary functions of the Regulator will be to establish and maintain a register of charities which will be accessible by the public.

The main purpose of the register will be to promote transparency.

The Regulator will make the register available for inspection by members of the public and will also publish the register on the internet. The register will therefore enable the public to confirm the bona fides of genuine charities, thereby limiting the scope for abuse.

All charitable organisations operating or carrying on any activities in Ireland will be required to register within six months of the establishment of the register. All charitable organisations which already avail of charitable tax exemption from the Revenue Commissioners will be registered automatically.

It will be an offence for a body not on the register to claim that it is a registered charity or to operate or fundraise as a registered charity in Ireland.

Modernisation of Fundraising

A number of sections of the Act deal

with fundraising and update the law in relation to charitable fundraising by providing for the amendment of the Street and House to House Collections Act 1962. This is in order to take account of developments in fundraising methods that have come about since that legislation was introduced, such as the collection of donations by direct debit or standing order for example, which are increasingly common in Ireland.

The Act also confers powers on the Minister of Community, Rural and Gaeltacht Affairs to make Regulations in relation to charitable fundraising, which would be designed to further regulate these activities in the interest of protecting the public. However, it is intended that this will be a reserve power and that agreed codes of practice will first be implemented in relation to fundraising activities of charities. Work on the agreed codes of practice has advanced significantly, in partnership with the charities sector.

Agreements with Charity Trustees or Connected Persons

Under the Act, charity trustees will be permitted to receive remuneration from the charity in certain specific circumstances in respect of work undertaken by them which is unrelated to their trusteeship. These provisions would also apply to persons who have a ‘personal connection’ with the charity trustee. All payments received by the charity trustee or connected person must be reasonable and proportionate having regard to the service provided. In addition, all of the charity trustees, other than the charity trustee receiving the remuneration, must be satisfied that the arrangement is in the best interests of the charitable organisation.

This type of arrangement may require an amendment to the constitution of the charitable organisation, as the constitutional documentation of most charities availing of charitable tax exemption from the Revenue Commissioners will prohibit such remuneration.

It is important to note that in the context of charity trustees receiving remuneration under contracts of employment, or in consideration of their acting as charity trustees, the law is unchanged, and these types of payments would remain prohibited.

Indemnity Insurance for Charity Trustees

The Act provides that a charitable organisation can purchase indemnity insurance in order to indemnify its charity trustees in respect of any liabilities of the

Ireland

current economic climate, which is likely to take time to overcome. It would be possible to commence different parts of the Act at different times, and this is being considered. However, because so much of the Act depends on the Regulator being in place, it is unlikely that a significant portion of the Act could be commenced early.

Ireland

102

IFC Review • 2010

charity trustee to pay any damages or other sum in respect of any act done or omitted to be done by the charity trustee in good faith and in the performance of their functions as a charity trustee.

Charities and Political Activities

The Act does not permit charities to support a political candidate or party, but charities will be permitted to promote a political cause if it relates directly to their charitable purpose. Therefore, while lobbying by charities will be permitted, charities need to ensure that they remain focused on their principal charitable purposes and engage in lobbying and similar activity strictly in furtherance of their charitable purposes.

Annual Accounts and Audit Requirements of Unincorporated Charities

Historically there have been no statutory accounting or filing requirements for charities. It is only where a charity is constituted as a company that it is obliged (subject to certain exceptions) by the Irish Companies Acts 1963 to 2009 to make an annual return to the Companies Registration Office. For charities that are set up as unincorporated organisations or by way of

trust, there is no such obligation to make any financial information available to the public.

The Act contains provisions requiring the keeping of proper books of account, as well as the filing of annual statements of accounts, by charitable organisations that are not companies. There are also provisions in relation to audit or examination of those accounts. Companies are excluded from these provisions, as they have their own requirements to file annual returns and accounts, and to have those accounts audited, under the Companies Acts.

Annual Reports of Charities

All charitable organisations (including companies) will be required to prepare and submit to the Regulator annual reports on their charitable activities during that year. The annual reports will be made available for public inspection by the Regulator, except those in respect of ‘private charitable trusts’, being organisations that are not funded by donations from the public.

Conclusion

The past number of years has seen a greater understanding internationally of the role played by voluntary activity and voluntary organisations in the building

of a strong, inclusive society. There is also growing recognition that, as charities are becoming more professional and sophisticated, they deserve and require equivalent progress in the legislative framework in which they operate.

The Charities Act 2009 signals the Irish Government’s recognition of the importance of the voluntary sector to Irish society and its commitment to supporting legitimate charitable activity.

A significant portion of charities operating in Ireland will not see a great deal of change once the Act is in force and the Regulator is established. It should be viewed as a significant achievement that the impact on many existing (mainly corporate) charities should be relatively small, while the legislation goes a long way to improve transparency and accountability within the sector.

However, the obligations of unincorporated charitable organisations to comply with the legislation will add a further administrative burden, which may be considered unwelcome at a time when the future of many charities is uncertain.

Commissioners for Special Purposes of Income Tax v Pemsel [1891] A.C. 531 1

Keep up to date every month with all new articles and more by registering for the IFC Review monthly e-journal. Simply email subscriptions@ifcreview.com with the subject ‘ej’

www.ifcreview.com/Ireland

103

IFC Review • 2010

GENERAL OVERVIEW

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Western Europe.

Greenwich Mean Time +/– 0.

4,200,000.

Dublin.

Dublin, Cork and Shannon Airports.

English.

Euro.

Democratic Republic. +353.

Statute and common law.

Finance, banking, international trusts.

TAX

Personal Income tax Corporate income tax Exchange restrictions Tax information exchange agreements

Standard rate of income tax at 20% and higher rate at 41%.

12.5%.

None.

For full details, please go to www.ifcreview.com/TIEA

SHARE CAPITAL

Permitted Currencies Minimum authorised capital Minimum share issue

All major currencies.

No minimum requirement. €1.

TYPE OF ENTITY

Shelf companies Timescale for new entities Incorporation fees Annual fees

Not available.

Five – 10 working days. €100.

Annual return €40.

DIRECTORS

Minimum number Residency requirements

Corporate directors Meetings/frequency

Two. Every company must have one Irish director or failing that, provide a fund to value of €25,394.76 as a surety.

Not permitted.

At the discretion and convenience of the directors.

SHAREHOLDERS

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Yes. Permitted but restricted.

One. None.

Must hold an annual general meeting.

ACCOUNTS

Annual return Audit requirements

Yes. Yes.

Registered office Domicile issues Company naming restrictions

Yes.

OTHER

www.ifcreview.com/Ireland

Yes.

Ireland

Ireland - Fact File

104

Isle of Man

IFC Review • 2010

The Isle of Man: Legislative Changes 2008/2009

by Nick Verardi, Local Group Head - Corporate & Commercial, Partner - Corporate & Commercial, Appleby, Isle of Man

T

HE ISLE OF MAN has a 25 year

record of unbroken growth and at the end of 2008 it was announced that the Island had retained its ‘AAA’ rating from Standard & Poors and Moody’s external ratings agencies.

The 2008/09 budget sought to strike a balance in a challenging economic environment by offering support for the economy and avoiding tax increases or public service cuts. The zero rate of corporate income tax introduced in the 2006 budget remained unchanged, with the higher rate of 10 per cent continuing to apply only to income arising from banking business carried out by Isle of Man licensed banks and to income derived from Isle of Man land and property.

2008/2009 has seen a range of new legislation introduced in the Isle of Man, with the key developments being in the areas of financial services regulation and company law.

Constitutional Position of the Isle of Man

The Isle of Man is a self-governing dependency of the British Crown.

It does not form part of the United Kingdom (UK). By long standing constitutional convention, the Island has complete autonomy in relation to domestic affairs, including taxation and business law.

The Island is not a Member State of the European Union (EU). Under Protocol 3 to the Act of Accession, whereby the UK became a Member State, EU rules only apply to the Isle

of Man in relation to a limited range of matters. Accordingly, EU directives on tax harmonisation, company law and financial services do not apply in the Isle of Man. The Island is a common law jurisdiction and its legal traditions draw heavily on those of England, so much so that English case law is of high persuasive authority in the Isle of Man. This legal stability gives the jurisdiction the commercial legal certainty long associated with the English legal system, combined with the flexibility of an international financial services centre.

Financial Services Legislation

The Isle of Man Financial Supervision Commission (FSC) is responsible for the regulation of the majority of the financial sector, namely banks, building societies, investment businesses and fiduciary service providers. Until 1 August 2008, each category of financial services provider had been subject to separate, independent legislation and regulations providing for different categories of licence.

On 1 August 2008, the Isle of Man Financial Services Act 2008 came into force. The Act consolidates the regulatory regime in respect of each of the categories under one Act, providing transparency and significant simplification. This is particularly so in the case of financial service providers who held more than one type of licence under the old regime. The Financial Services Act 2008 was accompanied by

consolidated secondary legislation and a new Rule Book.

The new Act and Regulations were the subject of much consultation between the FSC and licenceholders, reflecting the Government’s objective to ensure that any new rules were workable and represented a practical balance between regulatory constraints and the freedom required to promote business growth.

The result is a transparent and userfriendly regulatory environment which meets international standards.

Insurance Act 2008

The Isle of Man Insurance and Pensions Authority is responsible for the regulation of the Island’s insurance sector. A new Isle of Man Insurance Act 2008 came into force on 1 December 2008. The Act consolidated and repealed a number of earlier Acts and is now the primary legislation dealing with the regulation of authorised insurers, permit holders (foreign insurers), registered insurance managers and registered insurance intermediaries. The new Act is both clear and comprehensive and ensures that the Island has an appropriate and up-to-date regulatory framework.

Companies (Amendment) Act 2009

The Companies (Amendment) Act 2009 came into force on 1 September 2009. The Act primarily amends the Companies Acts 1931-2004, the Companies Act 2006 and the Limited Liability Companies Act 1996. The amendments were made at the request www.ifcreview.com/IsleofMan

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IFC Review • 2010

Company Officers (Disqualification) Act 2009

The new Company Officers (Disqualification) Act 2009 came into force on 18 June 2009. The new Act places all provisions dealing with the disqualification of officers of a company into one statute. The following are officers of a company for the purposes of disqualification under the new Act: • a director, secretary or registered agent (this includes a registered agent under the Companies Act 2006 and a registered agent under the Limited Liability Companies Act 1996); • a liquidator; • a receiver; • a person holding an office under any relevant foreign law analogous to any of the offices specified above in respect of a company; a person who, in any way, whether directly or indirectly, is concerned or takes part in the promotion, formation or management of a company.

Under the new Act, either the FSC, the official receiver, a liquidator or any past or present member or creditor of a company in relation to which a person has engaged in conduct rendering him unfit to be an officer, may petition the court for a disqualification order.

Previously, under the old disqualification www.ifcreview.com/IsleofMan

legislation, only the FSC could petition the court for a disqualification order.

In addition to disqualification orders, the Act introduces the new concept of “disqualification undertakings” which have been available in the UK for some time. This is an undertaking by a person that they will not, for a period of time, be an officer of a company without the leave of the court or the FSC. Only the FSC can accept a disqualification undertaking.

Isle of Man Companies and Capital Markets

Isle of Man companies continue to represent a growing number of the new applicants to AIM, PLUS and the Main Market, as an increasing number of businesses realise the significant advantages of using an Isle of Man vehicle to access capital markets in the UK. According to Hemscott’s report on AIM company registrations, June 2009, Isle of Man companies make up the largest share of the non-UK AIM companies’ market capitalisation.

Isle of Man closed-ended companies (ie companies which do not provide their investors with a right of exit) are not subject to ‘fund’ regulation in the Isle of Man and are instead treated in the same way as any other company for regulatory purposes. Accordingly, there are a number of important advantages to using an Isle of Man company for accessing capital markets, including: • no regulatory pre-approval requirements or fees in the Isle of Man; • no requirement for a licensed fund manager, administrator and/or custodian to be appointed; • no prescriptive requirements as regards board composition; • no restrictions on asset classes, investment strategy or leverage; • shares in an Isle of Man company can be traded through CREST. Extension of Takeover Panel Provisions to the Isle of Man

On 1 March 2009, Chapter 1 (The Takeover Panel) of Part 28 (Takeovers Etc) of the English Companies Act 2006 has been extended to the Isle of Man with the appropriate modifications. As a result of the extension of Chapter 1 of Part 28 to the Isle of Man, the Takeover Panel has been put on a statutory footing in relation to its regulation of relevant takeovers and mergers involving Isle of Man companies.

Accordingly, the rules set out in the Takeover Code will also have a statutory

basis in relation to the Isle of Man. Funds Update

The establishment and operation of investment funds in the Isle of Man is now governed principally by the new Collective Investment Schemes Act 2008 and the Financial Services Act 2008, both of which came into force on 1 August 2008.

The Isle of Man’s low tax status, political and economic stability and proximity to the key markets of Europe make it a compelling and cost-effective alternative for the domicile of investment funds. With a wide range of fund service providers and a sophisticated professional and banking infrastructure, the Isle of Man offers a solution for all fund promoters. The Isle of Man has a full suite of fund options ranging from fully regulated, retail-focused ‘authorised schemes’ to private fund arrangements that fall wholly outside the scope of regulation. Between these extremes are a range of unapproved funds that are subject to varying degrees of structural regulation.

The Isle of Man Fund Management Association has been working closely with the FSC to ensure that the Island is best placed to attract new fund business and, in particular, private equity business. The Isle of Man specialist fund type is the vehicle most commonly used for this type of fund business. The regulations governing the establishment of specialist funds have recently been amended to ensure that promoters and sponsors wishing to establish private equity schemes in the Isle of Man have as much flexibility as possible when establishing a scheme.

Aircraft Register

The Isle of Man Aircraft Register became operational on 1 May 2007. In the two years since its launch, the Register has gone from strength to strength. That an appetite existed for a reactive, wellregulated private register in a European friendly time zone has been evidenced by its success. The Register boasts a current compliment of 154 registered aircraft to date which include an Airbus 340 and, recently, an Embraer Phenom 100 – the first of its type to be registered in Europe.

At the beginning of May 2009, the Aircraft Registry announced its collaboration with IBA Group Limited for the provision of temporary

Isle of Man

of industry practitioners and in order to update the legislation to reflect evolving international standards (relating in particular to IOSCO and the IMF). The main amendments to note are: • simplification of the prescriptive prospectus requirements for a company incorporated under the Companies Acts 1931-2004 (1931 Act Company); • new powers to enable the FSC to issue directions to a company if it becomes aware of matters which give it reasonable cause to believe that a statement included in a prospectus is untrue or misleading or that a prospectus has been issued in contravention of, or otherwise than in compliance with, a provision of the Act; • changes to accounting requirements and clarification of auditor qualification requirements; • repeal of the prohibition on private 1931 Act Companies giving financial assistance; • introduction of a power to enable the FSC to make regulations allowing for treasury shares; and • clarification of accounting record requirements for companies incorporated under the Companies Act 2006.

Isle of Man

106

IFC Review • 2010

registration services for inactive commercial aircraft, which will be ‘parked’ for the duration of their registration on the Register as private aircraft. Due to the current economic climate there has been a need for a safe, neutral register for aircraft which are the subject of repossession by lenders or are simply between leases. The Register satisfies this requirement by providing the reassurance of a familiar statutory environment in a common law jurisdiction with stringent regulation whilst also being fiercely competitive on costs.

Tax Information Exchange Agreements (TIEAs)

As part of the OECD’s initiative on harmful tax practices, it has set internationally agreed standards on transparency and exchange of information on tax matters. One way in which these internationally agreed tax standards may be met is by countries entering into TIEAs. TIEAs are agreements entered into between countries which allow governments to enforce their domestic tax laws by exchanging, on request, information

relevant to tax matters covered by the arrangements.

The Isle of Man signed its first TIEA with the United States (US) in 2002.

A further TIEA with the Netherlands was signed in 2005, followed by seven TIEAs with the Nordic countries in 2007. Since then the Isle of Man has signed TIEAs with the United Kingdom (UK), Ireland, Australia, Germany, France and New Zealand.

The Isle of Man has also signed double taxation agreements with Estonia and Belgium based on the model published by the OECD. On 2 April 2009, the OECD issued a progress report on the implementation of the internationally agreed tax standards. The Isle of Man, along with jurisdictions such as the UK, the US, France and Germany, was on the white list of jurisdictions that have substantially implemented the internationally agreed tax standards.

Conclusion

The Island continues to offer a low tax business environment, political and economic stability and geographic proximity to the City of London and

the rest of Europe. In addition, the Island has built up a sophisticated professional infrastructure with a deserved reputation as a well-regulated jurisdiction. All of these factors, combined with a ‘can do’ business environment and close cooperation between the public and private sectors, ensure that the Island continues to meet the expectations of those choosing to do business here.

However, the Island is not complacent about its future. The Isle of Man recognises the need to ensure that it continues to achieve a high level of compliance with evolving international standards. In view of the current economic climate, international financial services centres will remain in the spotlight and will continue to have their financial services regulation, anti-money laundering legislation and financial stability assessed by international organisations against internationally accepted benchmarks. Most recently, the IMF has just published a favourable report on the Isle of Man following its assessment of the Island by an IMF team in September 2008.

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107

IFC Review • 2010

Isle of Man - Fact File

Location

Time zone

Greenwich Mean Time.

Population

App. 80,000.

Isle of Man

GENERAL OVERVIEW

Centre of the Irish Sea, within sight of England, Scotland, Ireland and Wales.

Capital

Airport(s)

One airport situated in the south of the island.

Language

Predominantly English but also Manx.

Currency

The Isle of Man is in currency union with the UK although it issues its

own currency, which is legal tender only within the Isle of Man. One Manx pound is therefore equivalent to one UK pound sterling.

Political system

International dialling code

Legal system

Centre’s expertise

Douglas.

Independent. +44 1624.

Common law jurisdiction.

International legal accounting, banking and fiduciary services.

TAX

Personal income tax

Low rates of income tax – each resident is entitled to an attractive pre-tax allowance with a low rate of 10% and the standard/high rate of 18%. The amount of income tax payable is capped at £100,000 per individual.

Corporate income tax

Most companies pay income tax at a standard rate of 0% on all income; companies that receive income from banking business or from land and property situated in the Island pay tax at a 10% rate on profits from those sources and the standard 0% rate on their remaining income.

Exchange restrictions

None for both resident and non-resident.

Tax information exchange agreements

For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies

Minimum authorised capital

No minimum. Concept of capital maintenance replaced by solvency test.

Minimum share issue

No minimum. Concept of capital maintenance replaced by solvency test.

Any.

TYPE OF ENTITY

Shelf companies

Timescale for new entities

Incorporation fees

Annual fees

Yes. 24 hours. £180. £320 fee on filing annual return.

DIRECTORS

Minimum number

Residency requirements

No.

Corporate directors

Yes.

Meetings/frequency

As the directors or members require.

One.

SHAREHOLDERS

Disclosure

Bearer shares

Annual return required including directors name. Member only if elect to file.

No.

Minimum number

Public share registry

Yes, only if elect to file.

Meetings/frequency

As the directors or members require.

One.

ACCOUNTS

Annual return

Yes.

Audit requirements

No.

OTHER

Registered office

Domicile issues

Company naming restrictions

www.ifcreview.com/IsleofMan

Must, at all times, be on the Isle of Man. Must have registered agent.

Transfer to domicile permissable.

The FSC can refuse to register a company with a name which in its opinion is undesirable, ie misleading, offensive or harmful to the public.

Jersey

108

IFC Review • 2010

Jersey: Functions of a Family Office

by Ian Rumens, Associate Director, Ogier Private Wealth, Jersey

A

KEY CHALLENGE facing many

ultra high net-worth (UHNW) families, particularly in today’s volatile environment, is how best to maintain, grow and pass on family wealth for future generations. This article touches on the role a ‘family office’ may play in this endeavour.

The characteristics and qualities that have served one generation well are not always found in future successive generations. Eventually, there will come a time when family leadership and perhaps entrepreneurialism must pass to the next generation.

For the canny patriarch or matriarch, a family office can provide an optimal succession planning and asset management/protection platform.

The family office can shepherd family members towards achieving their dual goals of enhancing wealth from an investment perspective whilst also ensuring that wealth is not dissipated over future generations.

Why Create a Family Office?

There are large differences between families in terms of their size, age www.ifcreview.com/Jersey

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IFC Review • 2010

Functions of a Family Office

In essence, a family office fulfils four primary functions, these being: • the investment function; • the trustee role; • the administration role; and • the financial administration role.

The Investment Function

The investment management function is arguably the core service of most family offices. Without doubt, one of the most advantageous aspects of the investment function performed by a family office is the development of an investment strategy/policy that covers the wide variety of assets often held by UHNW families.

The unparalleled bank of information that a family office may hold on family members means that the family office is ideally placed to analyse the family’s needs and to determine the best asset allocation for both individual members and for the entire family.

Often the complicated investment needs of the family result in multiple investment managers being employed, which can lead to them being entrusted with a modest portion of the family’s wealth. The end result can be an overall asset and risk allocation that bears little resemblance to what a single investment manager would have recommended.

By using either its own in-house Chief Investment Officer (CIO) and investment team or outsourced consultants/ advisors, the family office can evaluate each investment and determine whether it fits within the investment strategy guidelines and identify underperforming investments and asset classes that the portfolio is overweight in. In producing www.ifcreview.com/Jersey

a consolidated evaluation of the total portfolio, recommendations and prompt decisions (retention, disposal or addition) can then be made regarding specific investments.

One of the major investment difficulties for a family office is that UHNW families tend to hold a broad range of assets which include both traditional liquid assets (ie equities, bonds, derivatives) and illiquid assets (ie multi-jurisdictional property, artwork, aircraft and yachts). The family office investment advisors are more aware of the importance of such non-traditional assets in the wealth of a family (perhaps those likely to be retained in the family for generations) and can model policy around such exposures as appropriate.

When selecting a new investment manager, the family office can greatly assist in this process by providing detailed investment criteria and an holistic view of the family’s global asset allocation as well as a rigorous and objective assessment of each manager’s key strengths.

Most large families will have short, medium and long-term investment plans, performance benchmarks and liquidity requirements. The family office is often responsible for the development of the investment policy and the continual monitoring of the investment performance around these practical considerations to ensure that financial targets are met.

The family office, however it is constituted, is intended to support the family’s desire to provide an objective and disciplined control mechanism over the family’s affairs (during the patriarch or matriarch’s lifetime and, to an extent, from beyond the grave) and to enhance family wealth over future generations.

The dynamics of the family and the size of their wealth will determine whether the investment function of the family office is managed by a private bank, a wealth management boutique, a specialist arm of a trust company or an office specifically created by the family or a group of families.

The Trustee Role

Irrespective of whether the family structure requires the family office or members of it to act as a de facto trustee or not, in many circumstances the family office will fill this role. Together with the family, the trustee function of the office is responsible for several roles, including: • the implementation and development

of the family’s ‘core values’ statement, its ethos and objectives. The mission statement may provide the process by which the family’s wealth will pass down through the generations. In some circumstances it may set out the roles and responsibilities of each family member as well as the minimum levels of experience and educational qualifications required by a family member to be appointed onto a family board or council. As part of its mission statement, large wealthy families often create family councils or boards to provide a form of representative government for the family unit. The family council provides a means by which family members can interact in an orderly manner, and establishes the procedures by which any grievances are aired and dealt with; • educating the family members in good family governance, succession and wealth planning techniques and investment strategies; and in mentoring the younger generation to ensure that there is a suitable pool of family members to succeed retiring family members from any internal boards or councils; • creating checks and balances to ensure that there are no abuses or potential abuses of control/authority; and • setting out and developing the families’ philanthropic goals.

Within the trustee function, the office plays a significant role in communicating with the family. In fulfilling this function, the family office acts as the coordinator in organising family meetings, implementing changes to the wealth structure and in introducing new family members to various family boards or councils that may have been created as part of the governance structure.

In organising regular family meetings, the family office may enhance family harmony and minimise disputes and disharmony by ensuring that all the family members receive the same level of information and access to the same group of advisors. Such meetings can reinforce the family’s mission statement and goals to younger generations.

In many ways, this function is a cross between an investment gatekeeper, a social worker and a circus ringmaster.

The family office should be the first port of call for all professional relationships, effectively acting as a lynch pin between the lawyers, accountants, investment managers and other advisors in any project management affecting the family.

Jersey

range, scale of wealth, geographical spread, extent and nature of business interests and their attitude towards risk, philanthropy and privacy. The family office concept provides families with the opportunity to create a bespoke platform to govern the investment and administration of family wealth for current and successive generations.

It allows a means of expressing and putting into action families’ core values and goals, which are embedded through education of family members and enhanced through good communication. Control, governance and communication mechanisms within the family office are critical, both to assist with decision making and in terms of how the family can work best with external advisers.

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The Administration Role

The family office counsels the wealthy entrepreneur and implements their decisions. To accomplish this, the office is typically led by an ‘homme d’affairs’ and staffed by a group of advisors that may include an investment manager/financial analyst, trust administrators, lawyers and accountants. Within the family office an individual will be appointed as the main point of contact for the family. They are also responsible for keeping the family informed and updated about various family office projects.

Without a doubt, the key to a successful family office is efficient administration.

There are a multitude of ‘off the shelf ’ or bespoke technological software packages that can provide the administration office with the IT platform to run the office. However, whatever IT platform is used, the administration team must be able to: • provide administrational support to the family as cost effectively and as simply as possible. As part of the administrative role the office must be able to provide the family members and trusted advisors with consolidated reporting, accounting facilities, key document storage and, above all, an encyclopaedic knowledge of the family’s affairs; • deal with routine issues that affect large, mobile global families, such as employment contracts for staff, immigration issues and visa applications. Effectively, a family office must be able to access the right professionals to assist them with every eventuality that may arise; • collate and store, both physically and electronically, key family documentation which may include the family mission statement and goals, records of internal family meetings, wills, property title deeds, trust and company documentation, accounts, tax returns, and CDD documents. In holding such documentation, family members are relieved of the administrational burden that attaches itself to such dynastic family structures; • in certain circumstances, provide a full blown concierge service whereby the office acts as PA to the family.

Typically, such services will include booking and organising foreign travel, business appointments and social/charitable events; • administer any charitable function

of the family. Family offices are often used in coordinating the family members’ charitable gifting. From a practical viewpoint, this can be to ensure that the gifts are made as tax efficiently as possible or, alternatively, to ensure that any publicity is balanced correctly between the family’s desire for discretion and the benefit of publicity for the charitable organisation; and • collate and process various reports, such as risk profile reports and consolidated investment reporting, with live feeds in from the various investment houses. For the UHNW family with possibly hundreds of millions of US dollars to invest, there is a pressing need to receive up-to-date reporting. The extreme volatility of the markets over the past 18 months has underlined for many family offices the importance of having a clear, upto-date view of their market exposure and structure risk at all times.

The Financial Administration Role

The family office will be expected to coordinate the investment allocation and investment type, ie distributor or nondistributor funds, with any tax advice that may have been given. The family office can play a pivotal role in determining the form and frequency of the investment report. Determining the layout of the investment reporting not only makes it easier for the family office to produce consolidated investment reports, it makes it easier for account preparation and the filing of any tax returns.

UHNW families often attract interest from people who are vying for their time and, ultimately, for access to their wealth. The family office often acts as the buffer that insulates family members from such unsolicited attention. However, a fine judgement needs to be made to ensure that good investment or business opportunities are not dismissed out of hand.

The family office was once the preserve of only a few UHNW global families, but, due to the rise in popularity of multi-family offices their numbers have increased dramatically over the last two decades and they are now a useful planning platform for many families.

Irrespective of the type of family office, single or multi, the ultimate goal of a well-run office is to enhance and simplify the family members’ lives whilst concurrently increasing their global wealth and reducing family discord.

Recent Changes Affecting Wealth Management in Jersey

Many families and their advisors are looking at fresh ways to administer and control assets through new structuring vehicles in low-taxed, secure and well-managed offshore jurisdictions such as Jersey.

To add to its fleet of wealth structuring vehicles, Jersey has recently introduced new foundation legislation. Foundations now sit alongside existing vehicles such as companies, trusts and limited partnerships for use in financial planning and private wealth management strategies. For those clients from civil law jurisdictions, or jurisdictions where the concept of trusts is alien to them, Jersey foundations can provide a viable alternative in a white-listed jurisdiction.

In the Mubarak Case, the Royal Court of Jersey’s clarification of its jurisdiction in relation to how Jersey trusts interact with the orders and judgments of the English Family Courts in matrimonial proceedings has strengthened confidence in Jersey’s position in the offshore world.

Whilst it is difficult to quantify the impact on new business levels, new clients are certainly less concerned about asset protection in Jersey than they had been before the ruling.

Jersey’s up-to-date legislation relating to limited partnerships, together with the UK legislative changes to the way in which UK domestic trusts are taxed, has seen the previously little-used vehicle of family limited partnerships become a hot topic for use as a vehicle not only for wealth management structures but also for commercial use.

Finally, as a jurisdiction, Jersey has, along with the rest of the offshore world, come under increasing scrutiny as governments and global organisations such as the G20 focus their attention on offshore jurisdictions.

However, despite adverse publicity in the press, Jersey has been established as the highest rated offshore international finance centre in the competitive ranking Global Financial Centres Index, published by the City of London. In the International Monetary Fund’s assessment, Jersey ranked higher than the UK on standards of regulation and supervision.

Looking to the future, Jersey, with the amendments to the company’s law, the introduction of foundations and its wealth of expertise in administering sophisticated offshore structures, is well placed to remain an attractive jurisdiction from which to service wealthy families. www.ifcreview.com/Jersey

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GENERAL OVERVIEW

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Channel Islands.

Greenwich Mean Time +1 in summer.

90,000.

St Helier.

One. English, French.

Pound sterling.

Parliamentary democracy. + 44 (0)1534.

Customary law with a strong influence of common law.

Private wealth management and capital market transactions, trusts, international insurance, mutual fund administration and management, international banking.

TAX

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

20%.

Financial services business: 10% (excluding Fund Managers).

None.

For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies Minimum authorised capital Minimum share issue

Any currency.

No. No (subject to minimum number of shareholders as referred to below).

TYPE OF ENTITY

Shelf companies Timescale for new entities

Incorporation fees Annual fees

Available.

Two days for a standard incorporation. Fast-track incorporation available (two hours).

Standard: £200, Fast-track: £400. £150.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

Private company: one, Public company: two.

No. Allowed.

No specific requirement.

SHAREHOLDERS

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Yes. Not permitted.

Private company: one. Public company: two.

No, but disclosure of membership once a year in annual return.

Annual general meeting (can be waived).

Annual return Audit requirements

Yes. Public company: mandatory. Private company: optional.

ACCOUNTS

OTHER

Registered office Domicile issues Company naming restrictions

www.ifcreview.com/Jersey

Yes: must be situated in Jersey.

None.

Yes.

Jersey

Jersey - Fact File

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IFC Review • 2010

Labuan

Changing in Time with the Times

by Eesim Teo, Labuan International Business and Financial Centre, Labuan

N

O MATTER HOW OFTEN PUNDITS and philosophers

remind us that change is the only constant in a transient world, we often persist in behaving as if nothing changes – until the unforeseen happens. Then, a natural disaster like an earthquake or a tsunami overwhelms us, or a financial catastrophe brings material ruin. Events like these demonstrate again and again that those who are nimble and flexible can survive, yet deliberate change is seldom embraced as a far-sighted strategy.

Change at last appears to be coming into its own since the walls came tumbling down on Lehman Brothers and forced top economic policymakers to wrestle with the many-headed Hydra that has wrought havoc in the financial landscape. Among the targets singled out as part of what of went wrong are offshore jurisdictions, and the Organisation for Economic Cooperation and Development’s (OECD) determined push to purge non-tax paying offshore accounts has stirred much moral debate. Despite the Great Divide among believers and non-believers, though, there is grudging acknowledgement that offshore centres which are properly administered, regulated and tax compliant can actually contribute to the economic well-being of their neighbouring countries.

Labuan International Business and Financial Centre (IBFC), although relatively unknown, is regarded by those who do know it as a safe, robustly regulated jurisdiction. Labuan’s strategic location just off the north-west coast of Sabah, a Bornean state of Malaysia in the heart of South-East Asia, has much going for it. The current trend toward ‘flight to quality’, coupled with the continuing

economic boom in China and India which is encouraging investments to flow eastwards, makes Labuan especially attractive at present.

Labuan, despite its tiny land mass of just 95 sq. km, has chalked up a remarkable track record since its inception in 1990 as the country’s offshore financial centre.

Regulated by Labuan Offshore Financial Services Authority (LOFSA) which was set up in 1996, the jurisdiction to date is home to more than 7,000 companies; 60 banks; 140 insurance entities; 23 Trust companies; and scores of service providers including lawyers, accountants, tax consultants and audit and secretarial staff.

As the island has developed, adding modern infrastructure and telecommunications technology, so has its range of products and services grown.

Alongside these developments, a slew of legislation had been introduced to ensure the soundness of Labuan’s financial system. The jurisdiction maintains stringent screening measures including active membership of international watchdog groups like the Asia-Pacific Group on Anti-Money Laundering.

Recognising the value of change, the jurisdiction took a long, hard look at the future and made moves to prepare itself to meet the demands and challenges ahead. In January 2008, the sea-change began.

First, it re-named and re-positioned itself as Labuan IBFC in keeping with its goal to be the premier IBFC in the AsiaPacific region. In line with this objective, Labuan identified five key areas of focus, namely: holding companies, Islamic finance, insurance (including captive insurance), private wealth management, and lastly, fund management.

Next, a unit dedicated to marketing and promoting Labuan was set up and this was followed by a comprehensive review of the nine Acts and accompanying guidelines. These have been amalgamated into four new Acts, and four amended Acts. The legislative refresh is expected to come into force by the end of 2009.

The following is an overview of the changes relating to some of these laws.

Labuan Islamic Financial Services and Securities Act

Since Labuan took on the mantle of ‘first mover’ in Islamic finance, starting with the establishment of the first Islamic bank in 1998, it has been steadily building up a financial storehouse.

This decade has seen it issue the first global sukuk in 2002, one of the largest aircraft financing transactions using an Ijara leasing structure and most recently USD1.5 billion Islamic bonds

by Petroliam Nasional (Petronas), Malaysia’s national petroleum company.

It is thus timely that the groundbreaking Labuan Islamic Financial Securities and Services Act (LIFSSA) will soon make its debut, given the continuing rise of Islamic finance around the world as a viable alternative to financial services offered under conventional principles. LIFSSA will probably be the first of its kind in the world, an ‘omnibus’ piece of legislation that will clarify and streamline all the rules and guidelines issued over the years on Islamic finance.

In addition, among the chapters in LIFSSA will be some addressing Shari’a compliance in trusts and foundations as well as the appointment of a Shari’a Adviser of a trustee. On the www.ifcreview.com/labuan

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Labuan Trusts Act and Labuan Foundations Act

Amendments to the Labuan Trusts Act (LTA) and the introduction of the Foundations Act are expected to give Labuan IBFC an edge as a modern offshore centre for wealth planning. This is fortuitous as industry experts forecast that Asia’s share of the rich community is poised to grow annually by 12 to 15 per cent until 2013, making the region the largest source of high net-worth wealth investors after the USA. The LTA has taken the best from the best, drawing upon and improving features from jurisdictions such as the British Virgin Islands, the Cayman Islands, Guernsey, Jersey, Dubai and Mauritius.

One of the most attractive features in the LTA is the Labuan Special Trust, modeled after the British Virgin Islands ‘VISTA’ Trust. A central provision of the Labuan Special Trust is that it can be used to hold shares in a Labuan Holding Company, which in turn may own assets such as cash, real estate, art securities, businesses, insurance policies, etc.

These shares, which are ‘on trust to retain’, may be held indefinitely.

Interestingly, the management of the company may be carried out by the directors without any power of interference being exercised by trustees.

There is thus a distinct separation between the custodian role of trustees and their fiduciary role of investment (which is handled by the company directors). This provision meets the contemporary needs of high net-worth individuals or families who recognise that members of the next, younger and better educated generation may wish to attempt more sophisticated investment options; yet by separating the roles indicated above, the founders of wealth (the older generation) could still keep the original legacy intact. This feature is one of the most sought after in www.ifcreview.com/Labuan

Trust Law. Other advantages under the Labuan Special Trust include: settlors having wide reserved powers that are reasonable but do not compromise the trust; protection of a trust against a foreign law claim; variety of trust types including one unique to Labuan, “the advancement of human rights and fundamental freedom”; duration of trusts, including in perpetuity; and, clear guidelines relating to beneficiaries and the information they will receive.

The Foundations Act will be an added incentive for the wealthy to set up in Labuan IBFC as these foundations will operate in a similar way to trusts and should appeal to individuals or families from civil law countries like Indonesia, Thailand, the Philippines and the Middle East.

Recent Liberalisation Moves

In yet another change with the times, a ‘blanket approval’ was issued under which Labuan companies were permitted to deal with Malaysian (domestic) companies without prior approval, so long as the Labuan entity informed LOFSA within 10 days of the transaction. This approval came into effect on 1 August 2008.

Since then, a second liberalisation came into force from 1 June 2009, which allows a Holding Company registered in Labuan to set up a regional headquarters or management office in Kuala Lumpur, the nation’s capital.

Prior to this, a Labuan Company was required to have a physical presence on the island. Under the liberalisation move, the regional headquarters will pay tax under the Malaysian Income Tax Act 1967 (ITA) at the rate of 25 per cent but will have access to all of Malaysia’s 69 double taxation agreements (DTAs).

In all other matters, though, such as no foreign exchange controls and the convenience of dealing with a one-stop regulatory body, it will be treated as a Labuan Company. The flexibility of operating in a thriving, modern metropolis like Kuala Lumpur, combined with costs of operation which are about 40 per cent lower than those in Singapore or Hong Kong, give investors the best of both worlds.

Further liberalisation moves by the Malaysian Government are expected for the banking and insurance sectors within the next two years. These are certain to further enhance and accelerate Labuan IBFC’s growth.

Tax and the Issue of Substance

Legitimate businesses in Labuan IBFC enjoy a competitive edge as the jurisdiction is a low tax territory. Tax benefits are enshrined in the Labuan Offshore Business Activity Tax Act 1990 (LOBATA), which states that offshore non-trading companies are not subject to tax, while companies conducting offshore trading activities can opt yearly to pay 3 per cent of net audited profit or a flat rate of MYR20,000 (approximately USD5,800 at USD1=MYR3.5).

Alternatively, a Labuan company can make an irrevocable election to pay tax under the Malaysian Income Tax Act 1967 (ITA) at 25 per cent thereby gaining more secure access to all of Malaysia’s 69 DTAs and exemption on foreign-sourced income as well as capital gains.

Under the new world order of the OECD with its exchange of information standard, secrecy will not be tolerated – transparency and the need for ‘substance’ will predominate.

Where Labuan IBFC is concerned, nothing will be lost because the jurisdiction has stuck by its principle that only real, legitimate businesses are welcome. This means that the investor has to abide by the following criteria of substance as seen from the Malaysian tax perspective: • effective place of management should be the country of residence. This means business activities such as management or commercial decisions are actually conducted in the jurisdiction, as are the main activities of the entity; • accounts should be maintained in the jurisdiction; while the legal entity’s registered office could be located in Labuan, it must not also be regarded as a tax resident in another country; • all relevant requirements pertaining to submission of tax returns should be complied with when due; and • shareholding needs to be adequate based on the functions performed, taking into account the assets used and the risks assumed.

Even as the world shakes itself loose from the slough of despondency, Labuan IBFC is a bright spark worth keeping an eye out for, especially in the light of the Trusts Act and Foundations Act that meet many – if not all – the objectives of the wealthy individual or family.

Labuan

subject of Shari’a compliance, Labuan has been at the forefront in the drive towards internationally recognised and accepted Shari’a standards, setting the example with its own SAC that comprises globally acclaimed Islamic scholars.

Furthermore, Labuan has played a pivotal role in the establishment of the Malaysia International Islamic Financial Centre (MIFC), a national initiative which aims to position Malaysia as the international hub of Islamic finance and as the intellectual epicentre of the sector.

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Labuan

Labuan - Fact File GENERAL OVERVIEW

Location

Time zone

Population

Capital

Airport(s)

Language

Currency

Political system

International dialling code

Legal system

Centre’s expertise

TAX

Personal income tax

Corporate income tax

Exchange restrictions

Tax information exchange agreements SHARE CAPITAL

Permitted currencies

Minimum authorised capital

Minimum share issue TYPE OF ENTITY

Shelf companies

Timescale for new entities

Incorporation fees

Annual fees DIRECTOR

Minimum number

Residency requirements

Corporate directors

Meetings/frequency SHAREHOLDERS

Disclosure

Bearer shares

Minimum number

Public share registry

Meetings/frequency ACCOUNTS

Annual return

Audit requirements

OTHER

Registered office

Domicile issues

Company naming restrictions

Located at latitude 05 degree North and longitude 115 degree East and is about 10km off the west coast of the east Malaysian state of Sabah.

Greenwich Mean Time +8.

About 70,000.

Kuala Lumpur.

Labuan Airport.

English, Mandarin, Malay.

Ringgit Malaysia (RM).

Labuan is a federal territory of Malaysia, which is a democracy based on the parliamentary system of government. +6 087.

The Malaysian legal system is based on English laws. However, the Malaysian law has now evolved a character and structure of its own that includes native customs and laws. Final appeal lies with the federal courts.

Labuan IBFC’s pool of human resources comprises professionals from all forms in the financial sectors and support staff and provide a cost effective, convenient and connected international business and financial centre.

Residents working in Labuan are taxed at graduated scale ranging from 0% to 28%. Directors fees received by foreign directors from a Labuan offshore company are exempted from tax and there are tax incentives for non-residents working in the Labuan offshore financial industry.

Labuan offshore companies carrying offshore trading activities are taxed at either 3% of audited profits or RM20,000. Labuan offshore companies carrying on investment holding activities are tax exempt.

No currency exchange controls imposed on Labuan offshore companies.

For full details, please go to www.ifcreview.com/TIEA. In any foreign currency except RM. One share of any denomination in foreign currency.

One share of any denomination in foreign currency.

Usually not available as incorporation process very fast.

Incorporated within one-two working days.

Ranges from US$2,000 upwards.

RM1,500 (about US$440).

One – can be either individual or corporate entity.

No mandatory residency requirements but encouraged if companies wish to take advantage of the tax treaty benefits.

Allowed.

At the discretion of the companies.

There are secrecy provisions in the offshore legislations governing Labuan offshore companies.

Not permitted.

One – can be individual or corporate entity.

Records of Labuan offshore companies are not public records.

At the option of the companies.

Filed annually not later than 30 days prior to anniversary date of incorporation of the Labuan offshore company.

Depends on the Labuan offshore companies’ election on tax options – whether paying 3% tax on audited profits (in this case audit will be required) or payment of tax of RM20,000 (no audit required). All Labuan licensed offshore entities are required to be audited.

The principal office of a Labuan trust company is deemed as the registered office of a Labuan offshore company.

Required to carry out its business activity on, in or from Labuan.

Name of Labuan offshore company must have the word or words which connote a joint stock company limited by shares or any abbreviation thereof.

www.ifcreview.com/Labuan

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IFC Review • 2010

Liechtenstein

Liechtenstein in Turmoil: Legislative and Economic Developments of 2009

by Dr Markus Wanger and Dr Vivien Gertsch, Wanger Law and Trust, Liechtenstein

L

IKE MOST FINANCIAL AND OFFSHORE CENTRES, Liechtenstein

experienced economic turmoil during the course of the last year. 2009 is the first year in a great many that a negative result has been announced by the estate of Liechtenstein. Liechtenstein Government has disclosed a negative income of around CHF181 million in its budget of 2010. Besides the problems in the finance and economic sectors, there was a flood of regulatory developments and changes in 2009, and this trend looks set to continue into 2010. Most important for the finance sector was the new Due Diligence Act that came into force on 1 March 2009. Only a month later, this was followed by the new foundation law which was implemented in the Persons and Companies Act on 1 April 2009.

Also forecast is a change to the Criminal Code which will see an increase in the number of crimes which might lead to a money laundering case for falsification of documents and “abuse of the financial market rules”. A new VAT law is scheduled for 1 January 2010 and new VAT www.ifcreview.com/Liechtenstein

rates for 1 January 2011. A new tax law has been proposed by the government and is currently under discussion. The tax law is scheduled for 1 January 2011.

Also on this date, a new law for auditors and auditing companies is due which will implement directive 2006/43/EU of the European Union.

What are the most important of these changes? As of the implementation of the Due Diligence Act in March, all persons transacting business or receiving over CHF25 000 in cash are now obliged to follow the Act. Though banks, trust companies, life insurances and other participants of the financial sector remain the key parties addressed by the law, nominee directors, providers of an office or postal address, liquidators, tax advisors and auditors (to name but a few) now come within scope of the Act also. Given that the duties in this law are so strict, it might have been reasonable to make a distinction between banks and other participants – potential participants included – in the finance sector. In any case, if half the energy spent

Liechtenstein

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IFC Review • 2010

on due diligence matters was diverted to proceeding with the prosecution of criminals, it might be more useful and less complicated for all concerned.

Liechtenstein’s new foundation law basically implements existing practice and recent court decisions into law, a move which betrays something of a mistrust in the trust officers licensed by the jurisdiction itself. A special surveillance for foundations has also been set up, the Foundation Surveillance Authority (FSA).

As has long been the case, an audit and incorporation in the public register are obligatory for common-purpose foundations. Where private foundations may register themselves at the register, they are not compelled to. They could choose an audit but, again, are not compelled to do so; they could implement other means of control, such as a protector or an internal control.

The foundation board must now consist of at least two members. It is advisable for foundation boards to implement an internal control, which could also be made by a protector. Members of a foundation board who make wrong declarations to the public register or the FSA may be punished severely.

The new tax law was introduced to the public around February 2009. It is still in the status of a draft being discussed and it may be refined before going to Parliament. Major changes are the famous tax privileges of the domiciliary companies, and the fact that holding companies will cease to exist (with the possibility to opt for keeping them for another five years). There will be some smaller changes concerning income and wealth tax, and a speculation surplus on the taxation of profit deriving from (a transfer/sale/exchange of ) real property will be eliminated. The inheritance and gift tax, the coupon tax and the capital tax of legal entities will all be completely eliminated. A privileged taxation on companies merely holding their bankable assets might also be implemented.

No distinction will be made according to who owns these companies, therefore there will be no ring-fencing connected with this new privilege.

The new tax law may come into force on 1 January 2011. The new VAT law, coming into force in January 2010, is intended to ease up the administrative burden on the companies involved, especially in the building sector and entities dealing with cars. We will see whether this goal will be met. The new VAT rates will come into effect on 1 January 2011,

with the current rate increasing from 7.6 per cent to eight per cent, still a comparatively low rate in Europe. Liechtenstein has the same VAT system and rates as Switzerland.

As well as these changes to internal law, policy in international law has changed substantially. Liechtenstein has maintained a policy of strict professional secrecy over the last 90 years or more and has never given tax information away.

On 12 March 2009, however, the declaration was made that, from this date onwards, Liechtenstein will cooperate in tax matters in line with Organisation of Economic Cooperation and Development (OECD) and international standards, and will aid in the prosecution of those who do not pay or declare their taxes in other states correctly. This statement of intent is known as the ‘Liechtenstein Declaration’.

The development of Liechtenstein’s tax policy started a bit earlier, however.

The entering into of a mutual legal aid treaty with the United States (US) in 2002 marked the first time any tax information would be given away. This agreement was followed by an agreement concerning taxation on private interests with the European Union in 2005, where tax information (but only that which concerned this agreement) would be exchanged (but only in cases of abuse or fraud). In 2008, there followed the first tax information exchange agreement (TIEA), which again was concluded with the US, this time including information exchange which did not necessarily have its roots in a criminal case. Since the Liechtenstein Declaration and the grey listing of Liechtenstein on 2 April 2009, 10 TIEAs and two double tax treaties with information exchange clauses have been concluded. In the meantime, though, Liechtenstein has been delisted by the OECD and is ‘white’ now. At the moment, Liechtenstein is – according to the Liechtenstein newspapers – in negotiations with Italy and the Nordic States.

One particular goal for Liechtenstein is to negotiate a regular double tax treaty after showing that cooperation in tax matters is possible. Negotiations have already begun with many states. With most of these states, information will be exchanged as early as from 1 January 2010, which leaves about two months to implement possible changes. The most favourable agreement has been reached with the United Kingdom (UK), leaving time until 31 March 2015 to become tax compliant. Requests concerning tax

fraud may be made for actions after 1 January 2010, however.

Domestic legislation concerning the implementation of TIEAs in Liechtenstein has passed in Parliament with reference only to the US. It is very probable, though, that these domestic laws will be more or less the same.

Again, a big exception will be with the UK, where there is a domestic law to come that will force trustees and bankers to encourage their clients to be tax compliant. If the trustees are not tax compliant, they will be fined by Liechtenstein authorities. If they cannot be compliant for reasons beyond their own control, they may appeal to a panel which will be specially implemented by then. All trustees will be controlled by independent auditors on a regular basis, beginning 24 months after the domestic law comes into force, or (roughly) from 2012 onwards. These auditors will have to submit their reports to the panel.

Together with the UK TIEA, a Memorandum of Understanding (MOU) has been signed with English tax authorities. A joint government declaration completes the package. The MOU offers an interesting opportunity for tax disclosure for persons with a connection to Liechtenstein (which started in September 2009 for persons that had a Liechtenstein connection at that time).

Other persons may make use of this disclosure procedure from December 2009 onwards, simply by transferring part of their structures to Liechtenstein.

In all cases where correct taxation has not yet taken place, a declaration for the preceding ten years has to be made, be it for income tax, gift tax, inheritance tax or other possible taxes. Interest will have to be paid as well, and in most cases a 10 per cent fine is added. There is also the possibility of a composite tax rate of 40 per cent for all possible taxes for a UK tax year, if several taxes (like income tax and inheritance tax, et al) are involved. This disclosure facility might be very interesting for several clients. In our opinion, it is a good opportunity because it leaves a chance that some assets will stay in Europe and not be moved to distant jurisdictions.

Whether all these changes will mark the beginning of a new era which sees an influx of new business into the country cannot be predicted. But as the word ‘change’ is very similar to the word ‘chance’, we remain optimistic in Liechtenstein. www.ifcreview.com/Liechtenstein

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Liechtenstein - Fact File

Location Time zone Population Capital Airport(s) Language Currency Political system

International dialling code Legal system

Centre’s expertise

Central Europe, between Switzerland and Austria.

Central European Time.

App. 35,000 Vaduz.

None (120 km to Zurich airport).

German (Swiss-German Dialect).

Swiss Franc (CHF).

Political power shared between hereditary monarch and democratically elected government; extremely stable. +423.

Civil law system based in part on Swiss law, in part on Austrian law, and

incorporating the common law concept of ‘trust’.

Numerous types of companies, foundations and trusts, interesting also for insurance agencies and funds. Highly educated personnel, strict professional secrecy.

TAX

Personal income tax Corporate income tax

Exchange restrictions Tax information exchange agreements

Up to 18%.

0.2% capital tax; up to 15% income tax for residents, plus surcharge up to 5% depending on level of dividend/distribution; 4% coupon tax (eg, on dividends); 7.6% VAT. None.

For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies Minimum authorised capital

Minimum share issue

CHF, euro, US$.

30,000/50,000 depending on type of company.

Depends on type of company.

TYPE OF ENTITY

Shelf companies

Timescale for new entities Incorporation fees Annual fees

Public limited Company (AG), private limited company (GmbH); establishment (Anstalt); foundation (Stiftung); trust enterprise (Treuunternehmen).

Two-three days. approx. CHF 800.

Professional fees aprox. CHF 5,000 depending on time spent.

Additional fees for accounting and auditing (if required) on hourly bases and taxes.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

One-three depends on type of vehicle.

Yes. Yes. Depends on type of company and its statutes.

SHAREHOLDERS

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

No. Yes. Two. No. Depends on type of company and statutes.

Annual return Audit requirements

Usually requested.

Depends on type of company and statutes.

ACCOUNTS

OTHER

Registered office Domicile issues Company naming restrictions

www.ifcreview.com/Liechtenstein

Yes. Registered agent/trustee.

Name availability to be checked with registrar.

Liechtenstein

GENERAL OVERVIEW

Luxembourg

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IFC Review • 2010

Luxembourg: Looking Ahead to 2010

by Francis Hoogewerf, FCA, Luxembourg

Introduction

2009, following on from the financial crisis in 2008, is showing some positive signs for Luxembourg.

Unemployment, at around six per cent, is relatively low compared to the surrounding countries of Europe.

Bank secrecy has been attacked by the G20, especially in relation to Switzerland, Austria, Liechtenstein, Belgium and Luxembourg, but other smaller countries in Europe have felt their wrath also. As a result, Luxembourg was, for a time, on an Organisation for Economic Cooperation and Development (OECD) ‘grey list’, but after signing at least 12 treaties in record time, Luxembourg was transferred to the ‘white list’ in July this year, with Switzerland following in September (2009).

Will Information Exchange Make a Difference to Luxembourg as a Financial Centre?

Bank secrecy has, to some extent, been helpful to private banking. However, clients have realised for some years now that it would not last and have been making their own arrangements.

Equally, countries have been offering some form of amnesty, which have helped in certain cases.

Italy’s amnesty in particular has helped bring money back to Italy, as well as solving some of that country’s private banking dilemmas.

The information exchange rules will mean that undeclared assets will eventually leave the Luxembourg banking system, but both time and reasonable amnesties are needed to sort out any problems associated with this process.

The European Union (EU) has been trying to organise automatic exchange of information agreements

especially in relation to Liechtenstein.

Both Luxembourg and Austria vetoed the project in October 2009.

Investment Funds

Luxembourg’s investment funds would seem to be relatively healthy.

Luxembourg is number one in Europe and the number of funds is still growing. The Central Service for Statistics and Economic Studies (STATEC) figures show 3371 funds at the end of 2008, compared to 3457 funds at the end of September 2009. The net assets of those funds have remained steady at nearly EUR1560 billion at the end of 2008, compared to nearly EUR1557 billion at the end of September 2009.

The Specialised Investment Fund (SIF) is proving to be very popular.

The number reported at 30 September 2009 was 938, up from 617 in 2008 and just 222 in 2007.

SIFs can be semi-regulated for private, well-informed investors, or they can be fully regulated. Needless to say, government costs, including taxes, are minimal. The SIF is a flexible vehicle and can take advantage of Luxembourg’s tax treaties.

Banking

The number of banks operating in Luxembourg remains steady, at around 146 banks at the time of writing. The sum of the balance sheet totals, however, has gone down from EUR930.857 billion in December 2008, to EUR814.658 billion in September 2009 (according to Commission de Surveillance du Secteur Financier figures).

The August and September 2009 figures show signs of stability, rather than a downward trend.

Luxembourg banking has experienced www.ifcreview.com/Luxembourg

IFC Review • 2010

seen their share of problems, but these seem to be sorting themselves out.

Insurance

Luxembourg remains an attractive location for captive re-insurance companies, as well as life insurance.

Luxembourg’s life insurance sector is the 13th largest in Europe. Life insurance premiums rose 12.5 per cent in the first half of 2009, with classic guaranteed return products up 74 per cent. The single premium insurance policy remains attractive, especially when combined with a securitisation vehicle.

Foundation, but also new laws are being introduced, regarding ASBL, the not-for-profit association.

The Luxembourg Government is proposing to exempt microfinance funds from the Luxembourg subscription tax.

Apparently 45 per cent of the worlds microfinance investment vehicles are based in Luxembourg.

Intellectual Property (IP) and Research

Luxembourg’s ship register had 205 units on its books at 31 October 2009, representing 1.6 million tons. This may well be a record for a landlocked country. The Maritime business is growing. The ‘mega’ or ‘super’ yacht also has its place in Luxembourg, with the attractive Luxembourg flag.

Luxembourg, in a forward-thinking move, has moved to actively encourage research and development. This fits in well with the new Luxembourg University, already populated by a few thousand students from around the world. By making Luxembourg fiscally attractive for IP, Luxembourg can cement itself in the international market as a world centre for research.

There are advantages in holding patents and IP rights through Luxembourg entities, with important fiscal exemptions of up to 80 per cent.

Philanthropy and Microfinance

Conclusion

Luxembourg has finally been able to

Luxembourg is a founder member of

Maritime

trends and with its own financial, commercial and industrial industries.

Considering its size, the way Luxembourg keeps in close contact with countries such as China and Russia as well as countries from the EU, the Middle East and North and South America, is all the more impressive. As a result of these relationships, Luxembourg is a real international melting pot.

Luxembourg continues to sign new tax treaties with the world. It has ratified 50 treaties, and has signed, but not yet ratified, 17 more, making a total of 67treaties in play. These tax treaties may have been set up for one purpose, but with financial innovation can be used for any number of purposes and pursuits. When using treaties, ‘substance’ is, in certain circumstances, becoming relevant. In the long term, this is good for Luxembourg, making it an even more attractive country to live in.

When looking ahead to 2010, despite the fragility of the global financial system, Luxembourg at least has the advantage of being a small country able to adapt quickly to new circumstances.

Keep up to date with developments within global wealth management by registering for our free weekly world news round up, delivered every Friday to your inbox.

www.ifcreview.com/Luxembourg

Luxembourg

Keep up to date every month with all new articles and more by registering for the IFC Review monthly e-journal. Simply its fair share subscriptions@ifcreview.com of excitement. For enter the philanthropy market. Notwith the EU. The subject Luxembourg Government email the ‘ej’ example, Dexia, Fortis, Iceland, have only is there an attractive Luxembourg remains in close touch both with EU

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Luxembourg

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IFC Review • 2010

Luxembourg - Fact File GENERAL OVERVIEW

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Central Europe.

Greenwich Mean Time +1. +450,000.

Luxembourg.

One. Luxembourgish, French, German.

Euro.

Democracy. +352.

Roman law.

Financial.

TAX

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

0% to 38.95%.

29.63%.

No. For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies Minimum authorised capital Minimum share issue

Any convertible currency. €12,500 (SARL) or €31,000(SA).

25% of capital for an SA. 100% of capital for an SARL.

TYPE OF ENTITY

Shelf companies Timescale for new entities Incorporation fees Annual fees

No. Two days. €5,700 (some costs min capital). €7,500 (some costs min capital).

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

One. No. Yes. Annual minimum.

SHAREHOLDERS

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Yes, Nominee possible.

SA: yes. SARL: no.

One. Yes. One per year minimum.

Annual return Audit requirements

Yes. Yes, if two of the conditions are exceeded: average number of employees of 50; balance sheet total of €3,125,000; turnover of €6,250,000. SA requires a commissaire.

ACCOUNTS

OTHER

Registered office Domicile issues Company naming restrictions

Luxembourg.

No. Different from existing ones.

www.ifcreview.com/Luxembourg

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IFC Review • 2010

Madeira

Mergers and Spin-Offs: Clarifying and Simplifying Procedures

by Manuel João Pita, MLGT Madeira – Management and Investment, Madeira, SA

T

HE LEGAL REGIME applicable to

mergers and spin-offs in Portugal has undergone recent changes that have improved and modernised the respective process of implementation.

In fact, during 2009 two major documents (one law and one decreelaw) were published with the aim of rationalising and simplifying the process of corporate restructuring, whether considered on a national level or under the specific circumstances that involve a cross-border operation.

On 12 May 2009, Law n.19/2009 amended the Portuguese Companies Code and the Commercial Registry Code by adapting Directive n.2005/56/ EC of the European Parliament and of the Council of 26 October 2005 to the national law regarding cross-border mergers of limited liability companies, as well as adapting Directive 2007/63/CE of the European Parliament and of the Council of 13 November 2007, which calls for an independent expert’s report on a merger or spin-off of public limited liability companies and provides for an employee participation regime in the merger operation.

In general terms, the amendments adopted were implemented to simplify formal cross-border merger and spinoff procedures on the one hand, and to increase employee participation in such procedures on the other.

Regarding the formal procedures, www.ifcreview.com/Madeira

several amendments were inserted into the Companies Code and the Commercial Registry Code, pertaining to companies set up in Portugal involved in cross-border mergers, namely: • the insertion of additional formal requirements regarding cross-border mergers projects, namely mandatory information (even though according to Portuguese legislation and practice some of this information was already provided) that, although clear on national situations, was not clear on cross-border operations; • clarification that the merger project is to be reviewed by the statutory auditor appointed for that purpose – as set up in national legislation – and that, if all the companies involved in the merger so wish and agree, the expert review of the mergers project can be undertaken by the same statutory auditor or firm of statutory auditors which then executes a single report to all shareholders of the participating companies; • establishment of a system for monitoring the legality of crossborder mergers by the services of the relevant commercial registry through the issuance of a prior certificate for participating companies that are set up in Portugal. Such prior certification shall evidence compliance with the acts and formalities prior to the merger; • implementation of a legality control scheme at the time of the registry in

Madeira

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IFC Review • 2010

Portugal in case the merged company has its final head office in Portugal; and • adoption of a simplified merger procedure when the incorporated company is fully owned by the incorporating company, as is currently provided for in the Portuguese Companies Code for mergers between Portuguese companies.

As regards employee participation, it is understood that a company resulting from a cross-border merger that has its registered office in Portugal is subject to the Portuguese system of employee participation. However, the new law provides for a new system of employee participation for the merged companies when the following conditions are met: • at least one company merging has, during the six months preceding the publication of the cross-border merger project, an average number of employees that exceeds 500 and is managed under a system of participation of employees; and • the system currently provided for in national law does not offer the same level of employee participation available to the merged companies or does not provide that employees of establishments located in other member states may exercise the same rights of participation as employees working in the state where the company has its registered offices.

Also, Decree-Law 185/2009, published 12 August 2009, transposes into national law Council Directive n.2006/46/EC of 14 June 2006 on the annual and consolidated accounts of companies and adopts measures for the simplification and elimination of acts within the context of mergers and divisions, amending several major codes and statutes.

This new law not only provides for a series of measures regarding the simplification and modernisation of corporate restructuring procedures which will lead to a faster and less cumbersome process, but it implements new provisions concerning reporting obligations in order to improve the adjustment and comparability of financial information at European level and strengthen corporate governance policies.

Regarding the simplification on merger and spin-off operations, it is intended to take advantage of new technologies and web services to ease the respective procedures. In fact, according to the new legislation, all preliminary acts required for the merger or spin-off – the registration of the project, the publication of the notice to the creditors or the call of the general meeting of the companies – are now performed simultaneously. In accordance with these new provisions, an online draft merger or spin-off project is now available where the company may submit all required documentation and then submit a request for the registration of their project with the Commercial Registry Office.

Furthermore, the publication of the call for the shareholders meeting of a company resolving on the merger or spinoff project, along with the publication of the registration of the merger or spin-off project, is now automatically executed by the Commercial Registry Office free of charge, on the proviso that all necessary information is provided on the registry request.

Also, according to the new legislation, the company’s creditors may now oppose the merger or spin-off by reacting within one month of the publication of the registration of the merger or spin-

off project, thereby eliminating the obligation to publish a special notice to that effect.

However, this new law did not only proceed with the elimination of steps in the referred procedures. In fact, on a tax level, the law has amended a tax exemption request procedure applicable to corporate restructuring by establishing a 10-day deadline for the relevant tax authority to issue its opinion. At this level it has also reduced and eliminated several steps concerning this request procedure (namely, the intervention of other government agencies, such as the Competition Authority) and has established that such opinion is to be considered favourable in case it is not issued within the referred deadline.

Finally, the new decree-law extends the simplified merger by incorporation procedure to companies holding 90 per cent of the share capital of the company to be incorporated and not only to wholly-owned companies, as in the past.

2009 has seen an increased level of developments in Portuguese legislation which concern corporate issues.

The two laws discussed here have changed the corporate law scenario and have altered the equations on corporate restructuring possibilities by substantially amending the procedures for mergers and spin-offs.

Although part of the new rules are, in a certain sense, a transposition of European Union directives, it is very clear that they are also intended to ease all unnecessary formalities by making better use of new technologies and modern procedures. By these means Portugal will become a safer, simpler corporate environment for domestic and international businesses to thrive in.

MLGT Madeira 184x58mm.fh11 14/01/10 14:30 Page 1 C

M

Y

CM

MY

CY CMY

K

MLGT Madeira – Management & Investment, S.A. is specially endowed to render quality services at competitive prices to companies operating within the three areas of the International Business Centre of Madeira: the International Services, the Industrial Free Trade Zone, and the MAR – Madeira International Shipping Register.

The services above include: • the incorporation and administration of holding and trading companies; • international tax planning; • the use of double taxation treaties and European Directives; • shipping registration.

MLGT Madeira – Management & Investment, S.A., a management company incorporated in the International Business Centre of Madeira is connected with the law firm Morais Leitão, Galvão Teles, Soares da Silva e Associados, one of the highly regarded law firms in Portugal, representing corporations and businesses from all over the world.

Composite

The members of MLGT Madeira – Management & Investment, S.A. are highly specialised in the activity fields they operate in, and they guarantee absolute secrecy and the strictest confidentiality to all their clients in all their business matters. For further information, please contact us.

Nuno Galvão Teles, Francisco de Sousa da Câmara, Partners | Morais Leitão, Galvão Teles, Soares da Silva & Associados Rua Castilho, 165 – 1070-050 Lisboa | Tel.: (+351) 213 817 400 | Fax: (+351) 213 817 499 | mlgtslisboa@mlgts.pt Manuel Pita | MLGT Madeira – Management & Investment, S. A. | Av. Arriaga, Edíficio Marina Club, 73, 2º, Sala 212 – 9000-060 Funchal Tel.: (+351) 291 200 040 | Fax: (+351) 291 200 049 | mlgtsmadeira@mlgts.pt

www.ifcreview.com/Madeira

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IFC Review • 2010

GENERAL OVERVIEW

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Situated north of Canary Islands, north-west coast of Africa.

- 1h CET. 260,000.

Funchal.

Madeira International Airport.

Portuguese.

Euro.

Autonomous Region of the Portuguese Parliamentary Republic. +351.

Parliamentary Republic.

Services, financial, shipping and industrial.

TAX

Personal Income tax Corporate income tax Exchange restrictions Tax information exchange agreements

Progressive rate (general regime).

Total exemption or low rate, depending on the type of license.

For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted Currencies Minimum authorised capital Minimum share issue

Euro. @5,000 (LDA companies); @50,000 (SA companies).

One.

TYPE OF ENTITY

Shelf companies Timescale for new entities Incorporation fees Annual fees

Limited liability companies; changeable to SA companies.

One hour, provided all documentation from the shareholders is ready. @750 or @1,000 payable to SDM. From @1,000 to @1,800 payable to SDM plus management fees.

DIRECTORS

Minimum number

Residency requirements Corporate directors Meetings/frequency

One (for S.A. companies, if share capital is higher than @200,000 a minimum of two directors is required).

N/A. None, in case of limited liability companies; one per year in case of SA companies.

SHAREHOLDERS

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Yes. Register of bearer shares.

One. Only for limited liability companies.

One per year.

ACCOUNTS

Annual return Audit requirements

Once or twice a year.

Only for SA and pure holding companies, and limited liability companies that rise above some thresholds.

OTHER

Registered office Domicile issues Company naming restrictions

www.ifcreview.com/Madeira

Madeira.

Re-domiciliation is permitted.

Subject to administrative approval.

Madeira

Madeira - Fact File

124

IFC Review • 2010

Malta

Malta: Developments in a Time of Change

by Donald Vella and Louis de Gabriele, Camilleri Preziosi, Malta

O

VER THE PAST DECADE, Malta

has emerged as one of Europe’s most reputable financial services centres. Many factors contribute to this success, including the historical influence of several European dominions in Malta, its multi-lingual culture and its Mediterranean character.

One of our main advantages lies in our geographic location. Due to the fact that Malta falls neatly between southern Italy and Northern Africa, it is the ideal jurisdiction for business transactions between European countries and countries in Northern Africa and the Middle East.

Along with these natural advantages, Malta has maintained its status through innovation and a desire to create an optimum environment for doing business.

Malta takes pride in its quick response to fluctuating economic policies, made possible by the high concentration of financial service professionals who reside in this relatively small jurisdiction.

Capital Maintenance – Companies Act

A recent amendment affected to the Companies Act1 (hereafter, the Act) was a relaxation of the absolute prohibition on the granting by a private company of financial assistance for the purchase of or subscription for its own shares or shares

in its parent company. This prohibition was considered too severe since it prevented certain transactions that did not necessarily adversely affect the rights of those whom the prohibition is intended to protect – the creditors and shareholders – from taking place.

Financial assistance may now be granted by a private company if a majority of the company’s directors authorise the assistance for a specific transaction after taking into account the financial position of the company. The amendment also protects the company’s shareholders by requiring their approval of the directors’ decision by extraordinary resolution.

Furthermore, a declaration signed by two directors confirming that the previous requirements have been satisfied is to be registered with the Registry of Companies before the grant of financial assistance. Nevertheless, the prohibition still applies in the case of public companies.

Also incorporated into the Act was a procedure offering more protection to creditors where companies reduce issued share capital. In this scenario, a reduction would not take effect until three months from the date that the Registrar publishes the resolution to undergo such alteration in the Malta Government Gazette2 or on a website maintained by the Registrar, and also in a daily newspaper.

Where a creditor whose credit existed prior to the publication of the reduction objects to the alteration within this three month period, an additional measure against dissatisfaction of his claim has now been embedded in our Companies Act. Where the creditor convinces the Court that, due to the proposed reduction in the issued share capital, the settlement of his claims would be prejudiced and that no adequate safeguards have been obtained from the company, the Court may now either uphold the objection or allow the reduction on sufficient security being given.

This measure seeks to ensure that all creditors’ claims are protected and, if the company must reduce its issued share capital, the creditor may now resort to this procedure either to halt the reduction or to obtain sufficient security.

It is thus evident that our Maltese legislature has engaged in an active role to prevent any companies from curbing their debts and has meanwhile sustained a watchful eye over the protection of creditors’ claims. Such an approach should help to maintain creditor confidence in the Maltese finance sector and to encourage continued investment in companies and other undertakings.

Other amendments were effected to a specific corporate structure, the SICAV3 www.ifcreview.com/Malta

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IFC Review • 2010

CA M I L L E R I P R E Z I O S I ADVOCATES

LEVEL 3 VALLETTA BUILDINGS SOUTH STREET, VALLETTA MALTA VLT 1103 TEL +356 21238989 FAX +356 21223048

ation of any outstanding commitment for subscription.

In order to prevent abuses, the legislator has imposed certain requirements to be satisfied prior to which discounted shares may be issued. These conditions comprise of the following: • the memorandum and articles must authorise the issue; and • in no event may the value of such shares issued at discount be reduced to below the net asset value at the time the member to whom the discount is being granted first subscribed for the shares in their agreement with the SICAV. One of the principal reasons the SICAV has been placed under the spotlight is the recent increase in the re-domiciliation of foreign investment funds, ranging from public retail funds to more professionally tailored funds. This boost has been due to the SICAV structure, which is uniquely tailored for collective investment schemes.

Indeed, the combined net asset value of investment funds has been estimated at a high EUR9.3 billion in November 2008, up from EUR8.1 billion in July 2008.6 Naturally, this is evidence of Malta’s endeavour to maintain and develop its flexible regulatory structure in tandem with ensuring high levels of investor protection.

Taxation

Malta’s fiscal regime has been one of its strengths in its development as a financial centre in Europe. Since accession to the European Union (EU), Malta has become an ideal jurisdiction for tax planning and corporate structuring purposes due in no small part to its full-imputation system and its implementation of all EU non-discrimination principles.

The existence of an extensive international tax treaty network further enhances Malta’s reputation as a financial centre given that it is party to 53 double tax treaties. This includes the most recent bilateral double tax treaty signed with Serbia on 9 September 2009 with the aim of increasing trade and tourism between the two nations.

Corporate Governance

The corporate governance debate is central to company law reform in Malta, as it is to the majority of jurisdictions.

Although the importance of the subject is ever growing, a number of significant milestones have been achieved in order to remain in line with developments in the area. Malta’s adoption of the Code of Principles of Good Corporate Governance7 (Appendix 8.1 of the Listing Rules) and the publication of the Corporate Governance Guidelines for Public Interest Companies8 stands as testament to this.

The Code of Principles was introduced in 2001 and completely revised in 2006 in order to take into account the guidelines laid down by the Organisation for Economic Cooperation and Development (OECD),9 and to enhance the framework for good corporate governance in Malta. These Principles target companies whose securities are admitted to listing on a Recognised Investment Exchange, but do not apply to Collective Investment Schemes. In order to supplement these Principles, the Malta Financial Services Authority (MFSA) proposed a number of further amendments to the Listing Rules in order to transpose Article 1(7) of the Company Reporting Directive10, in effect adopting a ‘comply

CORPORATE M&A, Privatisation, Corporate Governance Insolvency and Corporate Recovery Corporate Support and Compliance

FINANCIAL MARKETS AND PRODUCTS Capital Markets, Investment Services, Investments Funds and Fund Management Regulatory Matters, Professional Investor Funds

EMPLOYMENT LAW Employment and Industrial Relations Health and Safety

TAXATION AND TRUSTS Estate Planning And Trusts

BANKING & INSURANCE

TELECOMS, IT AND IP

COMPETITION AND EU LAW

DISPUTE RESOLUTION

henri.mizzi@camilleripreziosi.com

PROPERTY, ENVIRONMENT AND UTILITIES Commercial Property, Energy, Water and Infrastructure Environment & Development Planning Legislation

TRANSPORT Shipping and Ports, Aviation and Airports

Website www.camilleripreziosi.com Email kristen@camilleripreziosi.com

TOURISM, LEISURE AND HOSPITALITY iGaming

LANGUAGES: Maltese; English; Italian

Louis de Gabriele:

louis.degabriele@camilleripreziosi.com

Henri Mizzi

www.ifcreview.com/Malta

Malta

(an investment company with variable share capital), rendering certain obligations less onerous. The Companies Act (Investment Companies with Variable Share Capital) (Amendment) Regulations, 2008 (Legal Notice 361 of 2008) removes the obligation to notify the Registrar of Companies about the pledge of securities issued by a SICAV, as well as the termination of the pledge. This procedure was considered superfluous as the Registrar is at no point aware of who the shareholders of the SICAV are.

As amended, any third party who may have an interest in a particular security may now request in writing that the SICAV provide them with information as to whether a pledge of securities has been recorded in the register of the holders of the respective securities.

The new regulations also envisage further amendments in the regulation of the SICAV; one with the aim of protecting the pledgee’s rights, the other to permit issuance of shares at a discount. In the event of default under a pledge agreement, the pledgee may now, upon giving notice to the pledgor and the SICAV, request that the SICAV purchase the pledged securities in settlement of the debt, or part thereof, which is due them.

The value of the securities pledged in this case will be their current net asset value.

Additionally, the latter amendment allows a SICAV licensed as a Professional Investor Fund (PIF), the units of which are held solely by qualifying investors4 or extraordinary investors,5 to make a discount to an existing member. The member must, however, have agreed with the SICAV to subscribe for any shares in the SICAV and the discount shall be granted and shall apply exclusively in consider-

Malta

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IFC Review • 2010

or explain’ approach. Accordingly, whilst the Principles11 are not mandatory, these Listing Rules state that a listed company’s directors must include a ‘Statement of Compliance’12 in their annual report providing an explanation of the extent to which they have adopted the Principles as well as the effective measures they have taken to ensure compliance with the Principles. The company’s auditors are also required to include a report on the Statement of Compliance. As a result, these Principles are observed on the basis that they are believed to constitute practices which are in the best interests of a company and its shareholders. Moreover, compliance is expected by investors as it evidences a company’s commitment to a high standard of governance.

The Guidelines, on the other hand, apply to companies which have an impact on the public in general, ie, companies whose operations affect a substantial sector of society. The Guidelines state that these companies should not only act in the interests of their shareholders but also in the communal interest. Even though the Guidelines are modelled on the Code and are likewise not mandatory, they establish principles of best practice.

Clearly, Malta’s regulator of corporate and financial services has recognised that good corporate governance principles are important, since they affect the manner in which companies are perceived both domestically and on an international level.

Proposals for New Laws and Amendments to Existing Laws

There are more proposals being discussed in order to update Malta’s current legislative framework.

For one, the MFSA is proposing to extend exemption on the requirement of a license for investment services to EU/European Economic Area (EEA)-based custodians of closed-ended retail collective investment schemes which are based in Malta, upon satisfaction of certain conditions. This exemption would hope to encourage a closed-ended retail collective investment scheme to be set up in Malta even though the custodian may carry out his duties in another EU or EEA jurisdiction.

The MFSA has delineated its reasons for not introducing the same exemption to open-ended retail schemes. In this case, it was deemed unsuitable to overturn the requirement of a local custodian in an open-ended retail scheme as the custodial role acquires more importance as a safeguard for investors, due especial-

ly to their duties verifying the accuracy of the fund’s net asset value calculation and ensuring that redemption and subscription requests are satisfied by the fund13.

Further amendments have been mooted. Consultation proceedings initiated on 21 May 2009 have drawn up a report relating to changes in Investment Services Rules applicable to PIFs targeting Experienced Investors14. The consultation document proposes two significant changes: • to reduce the entry bar from EUR15,000 to EUR10,000; and • to impose more rigorous regulations to ensure a minimum level of risk diversification.

The latter proposal aims to avoid financial difficulty due to the fact that there are no current rules on the need to spread the risk. This consequently poses the threat of having a single issuer or counterparty with failed investments15.

5.

6.

7.

8.

Conclusion

Despite the toll on the global market, the MFSA recently reported16 that operations have not degenerated and that the financial services industry has continued to grow, with banks, collective investment schemes, insurance companies and other finance related companies setting up operations here. Malta’s resilience in the face of the ‘crisis’ has been due to legislation attempting to overcome lacunae or doing away with obsolete provisions. Other factors include our strong regulatory regime, the personalised contact the Authority maintains with financial institutions and the fact that Maltese banks do not borrow for the purpose of lending.

All these efforts combine to enhance Malta’s growth in its financial services and enhance its reputation as a business location.

1. Cap.386 of the Laws of Malta.

2. Or any other official journal published by the Government.

3. An investment company with variable share capital.

4. According to the Investment Services Rules for Professional Investor Funds, published by the MFSA (Part B II: Professional Investor Funds Targeting Qualifying Investors, a threshold is imposed in order to enter a scheme. In the case of qualifying investors, the minimum investment which the scheme would accept is €75, 000 (or its equivalent expressed in other currencies). Moreover, the investor needs to sign a disclaimer stating that he is aware of the risks involved in participating in the scheme.

9.

10.

11.

12.

13.

In the case of extraordinary investors, as the name implies, the bar is raised to an even higher level than that of a PIF targeting qualifying investors. Part III of the Investment Services Rules for PIFs, Professional Investor Funds Targeting Extraordinary Investors, provides that the minimum investment which the scheme may accept is of €750,000. Similar to the qualifying investors scheme, investors must also sign a declaration stating that they aware of the risks.

Investment Guide & Business Directory, Finance Malta (2009 Ed.) 95.

Introduced in 2001 and completely revised in 2006, taking into account the guidelines laid down by the Organisation for Economic Cooperation and Development.

Published by the Malta Financial Services Authority, 2006.

A ‘public interest company’ means any one of the following three types of companies: (a) a regulated company; or (b) a company that has issued debt securities to the public and whose securities are not admitted to listing on a Recognized Investment Exchange; or c) a government-owned entity established as a limited liability company.

As explained in the OECD Principles of Corporate Governance 2004, these Principles were endorsed by OECD Ministers in 1999 and have since become an international benchmark for policy makers, investors, corporations and other stakeholders worldwide. They have advanced the corporate governance agenda and provided specific guidance for legislative and regulatory initiatives in both OECD and non OECD countries. The Financial Stability Forum has designated the Principles as one of the 12 key stansards for sound financial systems.

Directive 2006/43/EC. Listing Rule 8.37 and 8.38.

Listing Rule 8.39.

Consultation Procedure – Amendment Investment Services Act (Exemption Regulations) (10th August 2009).

14. A PIF targeting Experienced Investors is the least stringent scheme out of the three classes targeting different target markets: the PIF targeting Experienced Investors; the PIF targeting qualified investors; the PIF targeting extraordinary investors.

Indeed, the entry bar is not set very high and an investor may enter the experienced investors’ scheme with a minimum of €15,000.

15. MFSA September 2009 Newsletter.

16. Profs. Joe Bannister, Bright Future for Malta’s Financial Sector (The Malta Business Weekly, 21-27 May 2009). www.ifcreview.com/Malta

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IFC Review • 2010

Malta - Fact File Location

Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system

Centre’s expertise

Malta lies at the centre of the Mediterranean Sea, 93km south of Sicily and 288km north of Africa.

Central European Time.

410,290.

Valletta.

Malta International Airport, Luqa.

Maltese, English.

Euro.

Democratic republic. +356.

Mixed legal system; company law and commercial laws mostly based on UK statutes and general property law based on a Civil Code.

Corporate services, including holding company structures; investment services

including hedge fund domiciliation; captive insurance.

Personal income tax or individually.

Corporate income tax Exchange restrictions

Tax information exchange agreements

Rates vary according to income brackets and whether computed jointly with spouse

TAX

35%.

No, however in certain instances there may be a duty to notify the Central Bank of Malta for statistical purposes.

For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies Minimum authorised capital Minimum share issue

Any convertible currency. €46,587.47 (plc); €1,164.69 (private company). €46,587.47 (plc); €1,164.69 (private company).

TYPE OF ENTITY

Shelf companies

Timescale for new entities Incorporation fees

Annual fees

Not used in practice in Malta as companies can be registered in a short time given the correct documentation.

Two-three working days.

An authorised share capital fee. The fees range from €210 to €2,250 depending on share capital and on whether registration is carried out in paper or electronic format.

Fees vary from €85 to €1,400 according to the authorised share capital of the company and according to whether registration of the annual return of the company is carried out in paper or electronic format.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

Two in the case of a public company; one in the case of a private company.

None.

Permitted (director may be any ‘person’).

N/A.

SHAREHOLDERS

Disclosure

Bearer shares

Minimum number Public share registry Meetings/frequency

Yes, but when shares are held on trust or under a fiduciary agreement one only finds the information about the registered shareholders and not the beneficial interests.

Warrants to bearer can only be issued by public companies and then only if so authorised by the companies Memorandum or Article of Association and the shares are fully paid up.

Two. Yes. Every company must hold an annual general meeting.

ACCOUNTS

Annual return

Audit requirements

Required upon each anniversary of company’s registration. Must be signed by at least one director or the company secretary and submitted to the Registrar of Companies within 42 days after the date to which it is made up.

Required to appoint a Maltese auditor(s) at each AGM at which annual accounts are laid.

OTHER

Registered office Domicile issues Company naming restrictions

www.ifcreview.com/Malta

Yes. A public or private company may be designated by any name not already used by another company and not offensive or restricted. Such name must end with Plc or Ltd.

Malta

GENERAL OVERVIEW

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Marshall Islands

IFC Review • 2010

Marshall Islands Promotes Growth through Efficiency and Support

by Michael Wyler, Managing Director, IRI Corporate & Maritime Services (Switzerland) AG, Zurich, Geneva

I

N A TIME CHALLENGE,

OF

ECONOMIC

business leaders need an efficient and supportive relationship with their corporate domiciles, and the Corporate Registry of the Republic of the Marshall Islands prides itself on offering both. Long a domicile of choice for business entities, particularly those involved in international shipping, the Marshall Islands constantly evolves and adapts to ensure that it stays at the forefront of the international business community’s needs. Coupled with an expanding network of offices around the globe, the Marshall Islands continues to address the needs of its corporate citizens.

The Registry has witnessed dynamic growth in recent years, largely attributable to the Marshall Islands’ modern and responsive corporate law.

In keeping with its reputation for innovation, the Government of the Marshall Islands has recently amended the Associations Law to create an exception to the appraisal rights of dissenting shareholders of Marshall Islands publicly traded companies during consolidation or merger. The new section, 100(c) of the Business Corporations Act (BCA), now provides that, on merger or consolidation, the price for the shares of dissenting

shareholders may be pre-fixed through either the prospectus, Articles of Incorporation or resolutions for the issuance of the subject shares. This amendment to the BCA brings the Marshall Islands Associations Law in line with the corporate laws of New York and Delaware.

This is only the latest change in an ongoing strategy to support corporate clients that began nearly 20 years ago when International Registries, Inc. (IRI) became the Maritime and Corporate Administrators of the Republic of the Marshall Islands. The philosophy from the outset was to offer world class registration and customer services that are second to none.

That goal has largely been accomplished by IRI through the decentralisation of its operations.

With 20 offices worldwide, clients are able to contact a corporate specialist at any time who can register a new corporation, issue certificates of good standing, file an amendment or answer client questions.

With the Associations Law modelled on US corporate law, the Marshall Islands offers several advantages, including: • zero taxation; • free redomiciliation – migration of domicile, permitted both into and out

of the jurisdiction; • low administrative costs; • same day formation and filing of corporate documents; • simple maintenance with no annual filings, no notarisation requirements and permitted facsimile filings; • confidentiality of shareholders, members, limited partners, directors, managers and officers; • standard Articles of Incorporation available in English, Chinese, French, Portuguese, Russian and Spanish; • capital expressed in any currency; free Apostilles; • political stability; and • a staff of attorneys that is available to respond to inquiries regarding business entities.

Decentralisation is Critical to Success

Decentralisation of operations has been a hallmark of the Marshall Islands Registry from its inception, and while IRI’s offices are located in worldwide maritime centres, many of those locations are also key business centres.

With its roots in the maritime industry, the Marshall Islands Maritime Registry, the fourth largest open registry in the world, has over 2,000 vessels registered comprising more than 52 million gross tons. Additionally, the Marshall Islands www.ifcreview.com/MarshallIslands

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IFC Review • 2010

Cutting Edge and Globally Accepted Rules

As with the most recent change to the BCA, which was amended to ensure easy completion of mergers and consolidations of publicly traded entities, the Registry constantly works to keep the Marshall Islands Associations Law, originally adopted in 1990, in step with the latest developments in corporate governance. This is accomplished largely because IRI’s attorneys work closely with clients and the Government of the Marshall Islands.

IRI’s attorneys are available to respond to enquiries regarding corporate and maritime matters in the Republic of the Marshall Islands.

While IRI, as a corporate service company, cannot give legal advice, its attorneys can provide information and guidance on Marshall Islands corporate and maritime law, vessel and yacht registration, forming a foreign maritime entity and preparing and filing corporate documents.

IRI: A History of Service

IRI and its group of affiliated companies have been administering maritime and corporate registries since 1948 and offer a complete line of corporate and maritime services. Through a legislatively endorsed joint venture with the Government of the Republic of the Marshall Islands, IRI and its affiliates have administered the corporate and maritime programmes of the Republic of the Marshall Islands since 1990.

Background

A German possession until World War I, the Republic of the Marshall Islands was www.ifcreview.com/MarshallIslands

controlled by Japan between the World Wars. After World War II, they became a trust territory of the United Nations under United States administration until becoming an independent nation in 1986. In 1991, the Marshall Islands became a full member of the United Nations.

The Marshall Islands maintains a politically stable, democratically elected parliamentary system of government.

The Constitution, signed in 1979, is a blend of American and British models of government and the official language is English. The Marshall Islands has enjoyed political stability since its independence as a nation.

Government

Under the Marshall Islands’ parliamentary system, the legislature, known as the Nitijela, elects a President from among its members. In turn, the President nominates a Cabinet of sixto-10 members. The judicial system consists of local courts whose judges are appointed by the Cabinet. The court system is comprised of local courts of first instance, a Traditional Rights Court with jurisdiction over real property matters and a High Court with corporate and maritime jurisdiction.

Appeals may be brought before the Supreme Court in all cases.

Economy

Agriculture and tourism are the mainstays of the economy. The most important commercial crops are coconuts and breadfruit and small scale industry is limited to handicrafts, copra and tuna processing. The principal trading partners are the US, Japan and Australia.

Air transportation is facilitated by two international airports, plus airstrips scattered throughout the larger islands. There are 12 deepwater docks for large ocean-going ships. Excellent international communications are provided by satellite links for telephone, fax and telex.

Corporate Programme

First enacted in 1990, and continually updated, the Marshall Islands corporate law is one of the most modern in the world. Although based on US corporate law, the Marshall Islands law contains unique provisions enabling the use of British-style corporate management.

In addition, there are no requirements to have corporate documentation authenticated by a consular official.

In 1996, the Marshall Islands enacted its Limited Liability Company (LLC) Act modeled after the Delaware LLC law in the US. LLCs formed under the Act provide a cost-efficient way to maximise profits while minimising liability in a completely confidential environment.

In 2005, large scale amendments were made to the Marshall Islands Associations Law including amendments to the BCA, Limited Partnership Act and LLC Act. In addition to these amendments, the Partnership Act was repealed and a new act, the Marshall Islands Revised Partnership Act, which is based on the Delaware Revised Partnership Act, was adopted.

Professionals worldwide have recognised the Marshall Islands’ ability to aggressively and efficiently address the key issues facing the corporate industry. As governments and international organisations join forces to impact offshore entities, it has become increasingly difficult for a jurisdiction to retain the elements that make an offshore corporate programme successful. The Marshall Islands, however, has met these challenges head-on while maintaining its fundamental elements, making it the corporate jurisdiction of choice for many professionals.

Maritime Programme

The Marshall Islands ship registry programme was initiated by the Marshall Islands Government in 1988. With the adoption of a new Maritime Act in 1990, the maritime laws of the Republic were brought in line with the many changes in ship registration, regulation, financing and licensing which had occurred in the shipping industry.

In addition, the Marshall Islands has adopted groundbreaking legislation that permits the registration of a vessel that is still subject to a recorded mortgage in its present country of registry. This legislation provides for the continuation of the preferred status of the mortgage without interruption; thus, the foreign mortgage lien accompanies the vessel into the Marshall Islands Registry.

Vessels and yachts may be registered if owned by a Marshall Islands citizen, national corporation, limited or general partnership, LLC or a foreign maritime entity qualified in the Marshall Islands.

Marshall Islands

Maritime Registry enjoys an excellent reputation for service and quality and is listed on both the Paris and Tokyo Memoranda of Understanding white lists and the United States (US) Coast Guard Qualship 21 roster.

IRI’s specialists in these full service offices are local professionals, hired because of their knowledge and expertise with the local business and maritime communities. IRI’s decentralised operations are enhanced by a 21st century communications system that links all of the Registry’s offices. In addition to each office being linked to a fully backed up database, many of the offices are also linked by satellite-based video conferencing capabilities that allow issues to be dealt with quickly and pro-actively.

Marshall Islands

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IFC Review • 2010

Marshall Islands - Fact File GENERAL OVERVIEW

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Asia Pacific – Oceania.

Greenwich Mean Time +12.

60,000.

Majuro.

One international, three domestic.

English.

US $.

Republic. +692.

Common law.

Corporate and maritime registries since 1990.

TAX

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

N/A. None.

None.

For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies Minimum authorised capital Minimum share issue

All. None.

One.

TYPE OF ENTITY

Shelf companies Timescale for new entities Incorporation fees Annual Fees:

Yes. One working day.

US$650.

US$450.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

One. None.

Yes. Flexible.

SHAREHOLDERS

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

None.

Yes. One. No. Annual meeting.

Annual return Audit requirements

No. None.

ACCOUNTS

OTHER

Registered office

Domicile issues

Company naming restrictions

Provided with incorporation.

Free redomiciliation into the Marshall Islands; redomiciliation out of the Marshall Islands permitted.

No use of bank, insurance or trust. Names may be in any language, as long as Roman characters are used.

www.ifcreview.com/MarshallIslands

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IFC Review • 2010

Mauritius

Mauritius: the Global Business Sector

by Ludovic C Verbist, PhD, TEP, Managing Director, AAMIL Ltd, Mauritius

The Year in Review

In this article, we will review some of the changes that have occurred to the international financial scene over the past year. We will also look at how Mauritius is adapting itself to this new environment from an institutional and legislative point of view, and assess the impact these changes may have on the development of its Global Business Sector.

The International Environment

The year 2009 will certainly go down as one which will have fundamentally changed the approach to offshore financial services centres, known as ‘Global Business Sectors’ in Mauritius.

But the trend toward change here started in the late 1990s.

Over the past decade, several international organisations or groups of countries have pursued efforts to obtain transaction information from banking and non-banking financial intermediaries on their clients’ behalf.

Initially, it was claimed, this was to combat money laundering. Soon after ‘9/11’, though, this goal was expanded to include tax evasion generally, to enable governments to tax their residents’ income and wealth more effectively.

The Organisation for Economic Cooperation and Development (OECD) published its first blacklist, named ‘Harmful Tax Practices’, on 20 June 2000, which targeted 35 countries listed as ‘tax havens’. This was then followed by similar actions by the Financial Action Task Force (FATF), the Financial Stability Forum (FSF), the Basel Committee’s Paper on Customer Due Diligence (which has been subsequently endorsed by the FATF), IOSCO’s Principles on Client Identification and Beneficial Ownership for the Securities Industry, and IAIS’ Anti-Money Laundering Guidance Notes for Insurance Supervisors and www.ifcreview.com/Maritius

Insurance Entities. To this (nonexhaustive) list must be added the United States Qualified Intermediary Rules and the European Union Directive on Taxation of Savings, which is currently undergoing its first revision.

I was invited in September 2000 by the Government of the Seychelles to address a conference on ‘The Future of the Offshore Centres’. My recommendation then was already ‘bend or die’, meaning that if countries would not go along with the recommendations of international bodies, they would simply disappear as financial centres.

This is certainly still true today, when one notices that countries such as Switzerland (far from being a small exotic island) were put on the wrong side of the most recent list published by the OECD (Spring 2009). It subsequently scrambled to get at least 12 revised or new double taxation agreements (DTAs) or tax information exchange agreements (TIEAs) in place before October 2009 in order to be included on the white list. Regrettably, Mauritius, which has a network of 34 DTAs in force, was not to be included among Switzerland’s new treaty partner countries.

The Institutional Environment

Thanks to skilful planning and economic diplomacy by the authorities, Mauritius has never been on any international blacklist. Over the past 10 years, Mauritius has put in place various bodies to regulate the financial sector in its various aspects.

The Financial Services Commission (FSC) was set up in 2001. Its role is to licence and regulate the non-banking financial services sector. The non-banking financial sector includes institutions involved in insurance and pensions, capital market operations, leasing and credit finance, as well as global business activities.

The banks are supervised by the

Central Bank, the Bank of Mauritius (BOM). The main purposes of the BOM are to safeguard the internal and external value of the currency of Mauritius and its internal convertibility, and to direct its policy towards achieving monetary conditions conducive to strengthening the economic activity and prosperity of Mauritius. The BOM has been set up as the authority which is responsible for the formulation and execution of monetary policy consistent with stable price conditions.

The Financial Intelligence Unit (FIU) was set up in August 2002. Its role is to monitor all financial transactions in Mauritius and to report any money laundering offences and activities, or transactions related to terrorism to the Independent Commission Against Corruption (ICAC). ICAC was also set up in June 2002, with powers to investigate corruption offences and any matter that may involve the laundering of money or suspicious transactions.

The laws in Mauritius have been updated to assist a novel approach towards regulation – through the use of organisations or associations comprising of industry professionals which assist the FSC in supervising and regulating the activities of licensees.

These organisations shall be known as Self-Regulatory Organisations (SROs) and will be subject to detailed control by the FSC, including over their articles of association and shareholding, and their internal and industry rules. At the time of writing this article (October 2009), there is every indication that the FSC will issue new regulations before year end to enhance its processes for securing proper and adequate information on those who do business in Mauritius.

Briefly, to refresh the reader’s memory, any non-resident (corporate or individual) wishing to develop business outside Mauritius through Mauritian

tax treaties. It may bring its subsidiaries to the market, and equally may seek a listing of its own. Once authorised, the Sicar is a lightly regulated vehicle. A custodian bank is a requirement.

The SIF is restricted to “wellinformed” investors (over €125,000), IFC Review • 2010 is subject to a certain ‘spread of risk’, is easily administered, and has ‘lighttouch’ regulation.

Private Trust Company Services

The Sicar Venture Capital Vehicle

Luxembourg’s venture capital vehicle Luxembourg Trust Residence in Luxembourg A Luxembourg Trust tends to be a Since 1 January, 2006, with the abolition came into being in June 2004. fiduciary contract. It is used mainly for of the wealth tax, Luxembourg has Venture capital is much needed in the IPG ADMINISTRATION LIMITED capital market instruments and portfolios. suddenly become an attractive choice of European Union and theoretically the By adopting a trust law, Luxembourg residence for wealthy individuals within Sicar is a tax-attractive vehicle. In actual recognised the Hague Convention on Europe. fact it has been slow to take off, and is the international recognition of trusts.

Luxembourg can now be added to the subject to approval by the Luxembourg IPG (CSSF).

Administration (IPGA) is a licensed provider of services Bahamian Private Normally in Luxembourg, onlyto banks likesincorporated of Monaco, Belgium, Switzerland, Regulator Trust Companies.

We support families and their professional advisors in the establishment and their equivalent institutions may act the United Kingdom, and Ireland, and, in There is still a learning curve as to the and operation of PTC structures. Our service is bespoke, client-driven and confidential. as trustees. Trustees act for bond issues some respects, Luxembourg may become definitions of venture capital. A Sicar and securitisations. From a Luxembourg an alternative to the recently announced acquires assets in order to sell them, Services offered include: point of view, the trust instrument – United Kingdom non-domiciled rules. whereas a holding company tends to is a great help for holding assets off Luxembourg also has a final tax on keep its assets.

• Incorporationmember of the balance sheet. savings interest of 10 per cent, which is Any “well-informed” • Registered Office / Agent not added to other income. public may invest in a Sicar.

• Bahamas Registered Representative Specialised Investment Funds (SIF) A “well-informed” investor is someone • Directors & Officers (including Special Director) This vehicle came into effect in 2007, Summary who invests a minimum of €125,000 • Secretarial Services Indeed, Luxembourg continues to be and has proved to be a very attractive and or delivers a certificate from a credit • Administration an important investment fund centre. successful vehicle in the short time of its institution that he has the knowledge • Accounting Tel: +1 (242) 677 8700 It is the headquarters of the biggest steel existence as an alternative to setting up and experience to understand the company world, offshore. The annual tax at 0.01 per cent risks involved.

Fax: in +1the (242) 677 Arcelor 8701 Mittal, private banking continues to grow, and on the net asset value is minimal.

TheIPG Sicar is subject to tax, but Administration Limited the single premium insurance policies There is a minimum capital of with exemptions such as no dividend P. O. Box N-3924 info@ipg-protector.com continue to remain attractive as a way of €1,250,000, which must be reached one withholding tax and no capital gains tax.

Nassau, The Bahamas www.ipg-protector.com protecting assets. N year after formation.

The Sicar benefits from Luxembourg’s

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www.ifcreview.com/Mauritius

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The Bahamas

Luxembourg Mauritius

132

investor” is involved, there is very little orIFC regulation at all. In summary, the SV Review • 2009 is a tax-neutral vehicle, very much based on the concept of ‘spread of risk’.

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IFC Review • 2010

The Legislative Environment

Considerable efforts have been made to improve the legislative framework in the www.ifcreview.com/Mauritius

non-banking financial services sector in Mauritius by introducing amendments and new pieces of legislation.

The Financial Services Act was adopted with the aim of consolidating the whole licensing framework for the non-banking financial services and revisiting and updating the conceptual approach to global business. This Act clearly defines the activities of the FSC, whose functions are consequently broadened to guarantee the independence of the FSC as a regulator with a broad supervisory mandate.

In the insurance industry, recent amendments in the Insurance Act have removed certain administrative obligations on branches of foreign insurers operating in Mauritius, and provide for greater flexibility for the licensing of insurers.

The Securities Act was also amended to extend the scope of securities and exchanges, thus enabling the FSC to approve the trading of an expanded range of instruments, license commodities and other exchanges. These now include treasury bills, options, futures and derivatives. Moreover, the delay under which Collective Investment Schemes must comply with the requirements of the Securities Act has been shortened from five years to only three.

With the current global crisis challenging conventional banking and financial products, there is an increasing interest in Islamic products complying with the principles of Shari’a law.

Mauritius wants to position itself as a jurisdiction of choice for world-class Islamic financial services by offering a combination of both fiscal and non-fiscal benefits. In this context, Mauritius has already amended its legislation and issued the necessary guidelines to facilitate the implementation of Islamic banking and Shari’a-compliant products.

The Business Environment

The good reputation of Mauritius, to a large extent the consequence of a strictly regulated environment, has enabled strong growth in the global financial services sector, formally launched in 1989. It should be noted that there has been a reduction in the number of new incorporations in the global business sector so far this year, likely due to the global financial and economic crisis.

As per statistics made available by the FSC, as of June 2009 there were 32,895 global business companies registered and in good standing in Mauritius, out of which 9,883 were GBL1 (including 619 investment

funds) and 23,012 were GBL2. The figures from the Mauritius Chamber of Commerce and Industry put the total net asset value of all Mauritius registered investment funds at close to USD50 billion. Most of these funds are invested in India.

On a macroeconomic level, Mauritius has been doing very well in light of the world crisis. The country ranked 17 of the 183 economies covered by the report ‘Doing Business 2010: Reforming through Difficult Times’. It is the top subSaharan economy for the second year in a row in terms of the overall regulatory ease of doing business. It adopted a new insolvency law, established a specialised commercial division within the court, eased property transfers and expedited trade processes.

The Mauritius Stock Exchange indicators are up more than 40 per cent since the beginning of 2009, with foreign investors being increasingly active. Banks, sugar cane and hotel operators, as well as public work contractors, are among the most traded shares.

The Integrated Resort Scheme, launched in 2002, opened the property market for the first time to international investors. It allows foreign individuals or companies to buy freehold homes in dedicated resortstyle residential developments, generally providing hotel service and a golf course.

Several projects are currently on the market. A purchase of a house in such a project allows the foreigner and their close relatives to become resident in Mauritius, benefiting from a very pleasant lifestyle and a highly attractive tax environment, where only locally-earned or locallyremitted income is taxed and where there are no gift or estate taxes.

Finally, parliamentary elections are due to be held by June 2010 at the latest. Whether the incumbent government retains power or the opposition usurps them, it is widely anticipated that the next government will pursue the pro-development economic policies adhered to by the various governments of the past years.

Conclusion

Mauritius has taken, and will continue to take, all necessary steps to remain on any ‘white list’. In the words of Hon Rama Sithanen, Vice Prime Minister and Minister of Finance, Mauritius has “graduated to the ‘white list’ of clean, transparent, cooperative and compliant jurisdictions”. This means anyone wishing to deal with Mauritius can do so in a fully compliant environment, one which will facilitate any transaction worldwide.

Mauritius

entities, falls into what is known as the Global Business Sector. If they wish to develop a regulated activity, as listed under the law (insurance, asset management, brokerage, etc.) and/or avail themselves of using DTAs, they will incorporate a Category 1 Global Business Company (GBL1). This is a resident company subject to 15 per cent corporate tax before available tax credits.

Any other activity can be carried out through a Category 2 Global Business Company (GBL2), which is non-taxable.

While the FSC already collects all necessary information on beneficial owners and the activities of GBL1, it will expand this information gathering to GBL2. The FSC will henceforth collect data relating to beneficial owners, a business plan and filing of financial summaries for GBL2s.

These new requirements will help make the GBL2 more transparent and will allow financial intermediaries to be fully aware of their activities at all times.

It should, therefore, make these zero tax GBL2s more acceptable to countries which routinely put all ‘offshore’ companies onto their own national blacklists. To those clients who would find these new requirements too burdensome or costly by imposing to file financial summaries, other jurisdictions, such as the Seychelles, can still be proposed, which do not require communication of information to the authorities, nor keeping accounts of the IBC, nor filing of financial statements.

Finally, it must be noted that the Judicial Committee of the Privy Council of the House of Lords is the court of final appeal for all Mauritian cases.

This allows for great legal certainty and coherence of jurisprudence in line with United Kingdom precedents. It is a good check, and insures that the judiciary applies the law as well as possible by maintaining the permanent threat of a revision by the Privy Council.

This is very important and too little attention is generally given to this by investors. As an example, Singapore, which split from Malaysia in 1965, also allowed appeals to the Privy Council.

But when, in 1988, the Privy Council overturned a decision by the Singapore Courts against Mr Jeyaretnam, a member of the opposition, the Government of Singapore abolished the right of appeal to the Privy Council for its residents.

Mauritius

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IFC Review • 2010

Mauritius - Fact File GENERAL OVERVIEW

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Indian Ocean.

Greenwich Mean Time +3/4 winter.

1,250,000.

Port Louis.

SSR International Airport.

English, French, Hindi, Urdu, Chinese.

Mauritian rupees (Rs).

Democratic parliamentary system. +230.

Hybrid, mix of common law and civil law.

Tourism, Financial services, Agriculture and Textile.

TAX

Personal Income tax Corporate Income tax Exchange restrictions Tax information exchange agreements

15%.

15% with foreign tax credit for GBL1 companies. No taxation for GBL2.

No. For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted Currencies Minimum authorised capital Minimum share issue

Any currency.

No authorised capital, but stated capital (no minimum).

One share.

TYPE OF ENTITY

Shelf companies Timescale for new entities Incorporation fees Annual fees

Yes, for GBL2 companies.

Seven–15 days. c150 for GBL2 companies, c500 for GBL1 companies. c250 for GBL2 companies, c1,500 for GBL1 companies.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

One, two for GBL1 companies.

GBL1 companies only, for tax residency purposes.

Allowed for GBL2 companies only.

Yes, for GBL1 companies/not specified.

SHAREHOLDERS

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Only for GBL1.

No. One. No for GBL1 and GBL2 companies.

Yes, for GBL1 companies/at least once a year.

Annual return Audit requirements

Yes, for GBL1 companies only.

Yes, for GBL1 companies only.

ACCOUNTS

OTHER

Registered office Domicile issues Company naming restrictions

Yes. No. Very few.

www.ifcreview.com/Mauritius

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IFC Review • 2010

Netherlands

European Union and the Hunt for the Tax Cheat

by Leo Neve, LL.M., Tax Advisor, Neve Tax Consultants, Rotterdam, Netherlands

T

HIS PAPER WILL LOOK AT the

current developments within the European Union (EU) as they relate to tax information exchange and mutual assistance in the field of direct taxation. We will look at the so-called ‘Good Governance Package’ that is on the agenda of the Council of the EU, the position of bank secrecy countries such as Austria and Luxembourg, the agreements with third countries and further developments.

Introduction

Many countries are currently busy concluding tax information exchange agreements (TIEAs) in order to be able to obtain relevant tax information for specific and justified purposes. Among participants of the process are member states of the EU. With respect to direct taxation, the upper hand is given to the Organisation for Economic Cooperation and Development (OECD) and the Council of Europe. The OECD and the Council of Europe have prepared the Convention on Mutual Administrative Assistance in Tax Matters (CETS 127)1, concluded 25 January 1988, which relates to both exchange of information and assistance in the recovery of tax.

The Convention came into force in 1995 and is mainly used in relation www.ifcreview.com/Netherlands

to countries outside the EU. The Convention will soon be updated.

The legal basis for application of administrative assistance within the EU is Directive 77/799/EC when it relates to direct taxes, and Resolution 1798/2003/ EC when it relates to indirect taxes and customs2. The increased exchange of information in the field of bank interest is based on Directive 2003/48/ EC (Savings Directive). In order to apply this savings directive to countries neighbouring the EU member states, additional agreements have been made with Switzerland, Monaco, Andorra, San Marino and Liechtenstein. These additional agreements provide for a withholding tax instead of automatic information exchange. The savings directive ensures minimum effective taxation of savings in the form of interest payments, made in one member state of the EU to beneficial owners who are individuals resident for tax purposes in another member state by means of automatic exchange of information.

For a transitional period, Belgium, Austria and Luxembourg have been given the option to levy a withholding tax (currently 20 per cent up to 30 June 2011, thereafter 35 per cent). The transitional period shall end at the first full fiscal year following the later of:

Netherlands Cook Islands

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IFC Review •• 2010 2008 IFC Review

the rights of creditors or settlors with the • date of entry into force of an agreement passage of the International Trusts Act, of the last of Switzerland, Liechtenstein, 1984.

San Marino, Monaco and Andorra, with There is a relatively narrow window provisions that provide for exchange of in information which creditors may aschallenge upon request in OECD settlements on trusts fraudulent Model Agreement onas Exchange of transfers, although the general principle Information on Tax matters (OECD that a person takes a risk in settling a TIEA 2002); trust without ‘clean hands’ still applies.

• date on which the United States (US) is Certain protections are excluded if an committed to exchange of information action has already been commenced by upon request as defined in OECD TIEA a creditor against the settlor at the time with respect to interest payments to the trust is settled, and trust companies beneficial owners within the EU. require the settlor to swear an affi The transitional period is coming davit to an of solvency attesting to an ability to pay end now that Switzerland, Liechtenstein, debts as they fall due at the time of the Monaco and Andorra have made trust’s creation. to OECD standards commitments of On the other hand, a creditor must transparency and information pursue his action in the Cook Islands, exchange.

San Marino made this as foreign judgments generally commitment in 2000. As are a consequence unenforceable against the trustee. While, of the commitment to the new OECD in certain circumstances, compensatory standards, the EU is willing to sign damages awarded against the settlor an agreement with Liechtenstein. But can be recovered, damages which are Austria and Luxembourg are opposed determined by a multiple, or are punitive to that agreement. Belgium has, in the in nature, cannot. meantime, adhered to the automatic A body of case law has developed exchange of savings information. which gives a degree of certainty about The Conflict

With the current financial and economic crisis, national budgets and tax systems everywhere are under increased threat and the need for international tax cooperation and common standards has become a regular feature of international discussions. Good governance in the tax area is not only an essential means of

the level of protection that the Cook combatting cross-border tax fraud and Islands is likely to afford a settlor in any evasion, it can also strengthen the fight given circumstance. This body of case against money laundering, corruption law sets the Cook Islands apart from and the financing of terrorism. A global other jurisdictions with regard to asset consensus on the need for a continuing protection legislation. co-ordinated response to this problem is There are seven of licensed trustee emerging, consisting complementary companies in the Cook Islands, most initiatives in the areas of financial of whom have branches, parents, and regulation and taxation. affiliates in other jurisdictions. The EU Finance Ministers underlined Cook Islands has developed as a boutique the need to protect the financial system jurisdiction, focusing non-cooperative its attention from non-transparent, particularly on the administration of and loosely-regulated jurisdictions, trusts, and as the Cook Islands remains by calling for a toolbox of sanctions an attractive place to live, the trustee and stressing the need to strengthen companies do not want for competent “action to achieve international good and qualifi governance ed staff. in the tax area (transparency, It is expected that, over the next six exchange of information and fair tax months, the Cook Islands will bring competition)”. As a consequence, the in limited liability (LLC) European Council has company to decide on a full legislation, now common many package of measures aimed atin ensuring jurisdictions, and ideally suited to the better compliance (‘Good Governance one- or two-person business, or to be in the Tax Area Package’). If this package used as a vehicle to hold assets. This is accepted unanimously by the Council, legislation is expected to include asset the transitional period that Austria and protection features consistent with other Luxembourg have agreed to will come to offshore legislation. an end.

New insurance legislation is also These countries did not foresee in 2004 that the barriers for exchange of information would fall so quickly.

Who, in 2004, could have expected that the Swiss would give up their banking secrecy in March 2009? But the hunters are closing in on the bounty and if all conditions are met, Austria and Luxembourg must surrender and accept and implement an automatic exchange of

pending. Like the banking legislation, banking information. the new insurance legislation will refl ect In order to show that the current international thinking regarding Austrians are brave men, the parties insurance regulation, and and the law forming the government the will be focused primarily on ensuring opposition parties have agreed on a the interests of the insured continue to strengthening of banking secrecy. On be protected.

1 September 2009, they approved the Financial institutions in the Cook ‘Amtshilfedurchführungsgesetz’ (law on Islands are now more regulated than administrative assistance) that introduces many similar institutions in Organisation changes in the banking secrecy rules in for Economic Co-operation and relation to non-residents, but strengthens Development (OECD) countries. the domestic banking secrecy that However, has not been at the applies to this Austrian residents.

When expense of the asset protection features the transitional rules are terminated, of the jurisdiction. Rather, it has had Austrian and Luxembourgish banks the effect of enhancing the jurisdiction will be obliged to exchange information by deterring rogue clients, while giving on an automatic basis. Austria and greater comfort to legitimate users of the Luxembourg have therefore made services offered by trust companies in the political reservations to the signing of Cook Islands. the treaty with Liechtenstein.

There is much enthusiasm in the Cook Islands as to future growth. This positive The ‘Good Governance in the Tax outlook is reflected in the Financial Area’ Package3 Supervisory Commission’s website (www.

This package consists of many strands. fsc.gov.ck), which provides an overview of the jurisdiction, the applicable laws, The anti-fraud agreement with and the services provided.

Liechtenstein – COM(2009)n648 final puai@gcsl.info The aim is to combat fraud and other illegal activity which detrimentally affects their financial interests, and to ensure the exchange of information on tax matters.

The draft agreement with Liechtenstein covers fraud as relates to both direct and indirect taxation. It provides for a definition of fraud that covers both natural and legal persons (ie companies) and includes not just false documents and

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The amendments to the Savings Directive are based on Commissions’ proposal COM(2008)727 and Staff document SEC(2008)2767 They seek to extend the coverage of the Directive to certain interest payments to EU residents which are channelled through intermediate tax-exempted structures established in non-EU countries by putting a withholding obligation on residual entities, extend the definition of ‘interest payment’, and include captive and discretionary structures in the beneficial ownership concept.

A clear definition of residence of the beneficial owner is lacking, and the amendments also need to be implemented in relation with the five European, non-EU member countries and the 10 dependent and associated territories, as well as with other important financial centers (such as Hong Kong, Singapore and Macao).

Cooperation between tax administrations– COM (2009)0029 final The new directive will replace the existing mutual assistance Directive 77/799/EEC of 19 December 1977, as amended by Directive 2004/56/EC of 21 April 2004.

This directive is today the basis for the assistance that EU member states provide each other. But even with the directive, there is not much actual assistance provided between the member states. The directive incorporates the obligation to honour a request for information, allows mutual investigation teams and provides for spontaneous and automatic exchange of information. The legal basis for the Commission’s activity in this field is small.

It is not really ‘necessary’ (subsidiarity principle) that the Commission presents legislation in this field4. Member states are largely free to design their direct tax systems in a way that best meets their domestic policy objectives and requirements. For value-added tax (VAT), this is different. www.ifcreview.com/Netherlands

This new directive would create new practical tools to enhance administrative cooperation as well as introduce two important new elements for reinforcing EU action at international level.

First, it would introduce a mostfavoured nation clause whereby Member states would be obliged to provide another member state the level of cooperation that they have accepted in relation to a third country. Second, the proposal would prohibit Member states from invoking bank secrecy for nonresidents as a reason for refusing to supply information concerning a taxpayer to his or her Member State of residence.

Cooperation in the field of tax recovery – COM(2009) 0028 final This proposal aims to increase the efficiency of assistance so as to enhance tax administrations’ capacity to recover unpaid taxes, and thus contribute to the fight against tax fraud. The proposal will replace Directive 2008/55/EC with new provisions to reinforce recovery assistance. The main objectives are an extension of its scope, preferential use of EC legislation for the recovery assistance requests between EC Member states, reinforcement of possibilities to request mutual assistance and the speeding up of treatment of mutual assistance requests.

Mandate to EU Commission to negotiate anti-fraud agreements with Andorra, Monaco, San Marino and Switzerland In these agreements, general principles of good governance should be implemented, including provisions similar to those applicable within the EU under state aid rules, as well as specific provisions on transparency and exchange of information for tax purposes. The existing agreement with Switzerland contains provisions relating to administrative assistance and to mutual legal assistance in criminal matters under the scope of indirect taxes (VAT and excise duties) and custom offences, corruption and money laundering. Direct taxation is excluded from the scope of the existing agreement. That will be part of the new agreement to be negotiated. The aim here is to combat fraud and other illegal activity and to ensure administrative cooperation through the exchange of information on tax matters.

Further Developments

It is clear that the EU needs to carry forward discussions with other third countries, in particular Singapore, Hong Kong and Macao, in the light of

the new consensus on transparency and exchange of information, and to explore with these jurisdictions the application of appropriate equivalent measures to those contained in the Savings Directive.

The European Commission has adopted a proposal for a recast of the regulation on administrative cooperation in the field of VAT, extending and reinforcing the legal framework for the exchange of information and cooperation between tax authorities. One of the key elements of that proposal is the creation of a legal base to set up EUROFISC, a common operational structure allowing Member states to take rapid action in the fight against cross-border VAT fraud. It can be expected that in a few years that database will also be made available for direct taxes.

Conclusion

The EU and its Commission are moving forward towards greater transparency and improved cooperation. The European Commission, however, has limited means to instigate further progress. The legal basis is small and direct taxation is not within the realm of the Commission or Council of Ministers. The efforts so far are for better cooperation, streamlining procedures and use of databases. Real development must come from bilateral agreements between the sovereign states or from the multilateral treaty models of the OECD or the OECD/Council of Europe jointly. Directives aim at harmonisation, but have no direct enforcing effect.

Rotterdam, December 2009 1. Database Council of Europe http://conventions.coe.int/ 2. The Legal difference between the instrument of a directive and the instrument of a resolution is that a resolution has direct effect, whereas a directive needs to be implemented. It follows that a directive is addressed to the member states and a resolution to the persons. A member state cannot rely on the provisions of the directive against an individual ( no inverse direct effect).

Case law ECJ: C-152/84 Marshall I, para 48, C-91/92 Dori, para 24 and C-192/94 El Corte Ingles, para 15. The binding nature of a directive exists only in relation to ‘each Member State to which it is addressed’.

3. COM(2009) 201 final, 28 April 2009 4. In response to a question of Viviane Reding to the Commission (91966E0953), the Commission answered in 1996 that direct taxes are within the jurisdiction of Member states and that the fight against tax fraud is therefore mainly a task of the national authorities.

Netherlands

false tax returns, but also the submission of incomplete tax returns. The text covers administrative cooperation in tax matters requiring the exchange of information that is foreseeably relevant to tax administrations. It allows parties to trigger administrative assistance that cannot be refused on the sole ground that the information is held by a bank or anonymous investment vehicle, and judicial assistance for acts that are punishable under the laws of the parties (not necessarily penal code).

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Netherlands - Fact File GENERAL OVERVIEW

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Netherlands.

Greenwich Mean Time +1.

15,000,000.

Amsterdam.

Schiphol (Amsterdam), Rotterdam, Eindhoven.

Dutch, many speak English.

Euro.

Democracy, two houses of representatives.

31.

Civil code.

TAX

Personal Income tax Corporate income tax Exchange restrictions Tax information exchange agreements

Max 52%.

25.5 %.

No. For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted Currencies Minimum authorised capital Minimum share issue

Euro. €18,000. €18,000.

TYPE OF ENTITY

Shelf companies Timescale for new entities Incorporation fees Annual fees

Not allowed to incorporate for the shelf.

Two-three weeks. €2,000. €3,000.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

One. None.

Yes. Once.

SHAREHOLDERS

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Solely if one shareholder company.

Yes, for NV companies.

One. No, at office of company, not for public.

One.

Annual return Audit requirements

Yes. Depending on size.

ACCOUNTS

OTHER

Registered office Domicile issues Company naming restrictions

Seat or place of residence.

Minor restrictions.

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IFC Review • 2009

Nevis

Nevis – Dealing with the Repercussions of the Economic Meltdown

by Derek Lloyd, Director and Insurance Manager of AMS Insurance (Nevis) Ltd, Nevis

I

N THE LAST EIGHTEEN MONTHS OR SO, events around the globe

have changed the financial world out of all recognition but, despite this adverse backdrop, Nevis has continued to prosper as an evolving, regulated and credible domicile.

Indeed, significant progress has been made in the signing of tax information exchange agreements (TIEAs) and seven countries, including the Netherlands, Denmark, Liechtenstein and New Zealand, have already signed in 2009, with a number of other countries anticipated to sign early in 2010.

Nevis continues to be subject to compliance with international standards for the prevention of money laundering and countering the financing of terrorism. The most recent assessment of the Federation’s compliance with these standards was conducted late in 2008, whilst the Mutual Evaluation Report was adopted at the May 2009 Plenary of the Caribbean Financial Action Task Force (CFATF).

All of these developments have combined to raise the profile of Nevis overall as an offshore centre, and particularly as an insurance sector par excellence. Nevis has seen significant growth in the number of licensed entities since the enactment of the Nevis International Insurance Ordinance, 2004, and the jurisdiction continues to make significant progress up the international league table for numbers www.ifcreview.com/Nevis

of licensed captive insurance companies and other regulated insurance entities within the domicile. It has also seen an increased number of insurance managers becoming licensed in the territory.

The lack of consumer confidence in major financial institutions has undoubtedly caused an upsurge in captive insurance formations and Nevis provides a credible option for such companies within a regulated, compliant and competitive environment.

Competitive

Minimum capitalisation requirements for the single-owner, pure captive, compare favourably to other jurisdictions, starting at USD10,000 and rising to USD50,000 dependent on ownership. However, that is balanced by minimum solvency requirements generally on a par with many of the leading offshore jurisdictions and states in America that now have captive legislation. Higher minimum capitalisation requirements are sensibly in place for other licensed insurance entities, such as re-insurance companies. For captives, the minimum solvency requirements are 20 per cent of net written premiums up to the first USD5million, and 10 per cent of the surplus thereafter.

Regulatory fees are also attractive to the prospective new captive-owner, with first-year licence application and

annual insurance licence fees payable to the government starting at USD1,880 for the pure captive.

Choice

The insurance legislation requires a minimum of two directors, but neither of them have to be locally based, and nor does the company have to hold its annual board meetings in the domicile.

However, many captive-owners will take advantage of the splendour and beauty of the island to combine business and pleasure at one of the many high-quality resorts in Nevis.

There is no statutory requirement either for local legal representation, local bank accounts or local auditors, although the latter must be pre-approved by Nevis Financial Services.

Ultimately, all these facets provide the captive-owner with a wider choice and greater control of how they run their business, with resultant time and cost benefits to the operation.

Combine the competitive cost environment with mature and established company laws, a legal system based on English common law (with the Privy Council in England as the ultimate Court of Appeal) and a regulatory body that is communicative and responsive and you have a formula for success. This is clearly evidenced by the expansion and development of Nevis as an increasingly sophisticated and well-regulated insurance domicile.

Nevis

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IFC Review • 2010

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www.ifcreview.com/Nevis

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IFC Review • 2008 2010

www.ifcreview.com/Nevis

fact that no taxation is levied from within the domicile for licensed insurance viability andthat existence ofunderwriting the captive if companies make that was the sole purpose in establishing profits must be an advantageous factor in the entity in the first place. selecting Nevis as the ultimate domicile Any commercial enterprise looking to of choice for the parent company. establish a new operation should always Furthermore, no income tax, direct, or evaluate the political, geographical, indirect tax shall be levied in Nevis upon and economic elements in advance of transactions, contracts, securities or other making that selection, and they will dealings, profits, or gains of a registered find that Nevis qualifies with aplomb in insurer. No tax is levied on dividends all of these regards. or earnings attributable to shares or securities of the registered insurer. There Innovative is also an exemption from stamp duty, The legislation itself is modern, and from all currency and exchange pragmatic and innovative, and section control restrictions.

17 of the Ordinance encapsulates this.

This allows for statutory funds to be Innovative established by the licensed insurer that The legislation itself is modern, in turn enable that insurer to ring-fence pragmatic and innovative, and section the assets and liabilities allocated to each 17 of the Ordinance encapsulates this. individual statutory fund. The proviso to This allows for statutory funds to be this is that all parties must be made aware established by the licensed insurer that at the outset that section 17 provisions in turn enable that insurer to ring-fence are being utilised in the formation and the assets and liabilities allocated to each operation of the company. individual statutory fund. The proviso to If structured in the correct manner, this is that all parties must be made aware it can be argued that, under section 17, the licensed entity is granted greater flexibility than the more traditional

at the outset that section 17 provisions are being utilised in the formation and cell structure for multi-insured operation of the company. programmes, making the accounting If structured in the correct manner, function at least far less onerous. it can be argued that, under section 17, the licensed entity is granted greater The Future flexibility than the more traditional cell Over the last few years, Nevis has moved structure for multi-insured programmes, from limited regulatory supervision with the accounting function at least far prior to the enactment of the insurance less onerous. legislation to the imposition of an increasing compliance and corporate The Future governance regime for regulatory regulated To progress from limited insurance entities the enactment domicile. super vision to inthe of The continued is testament legislation and growth the imposition of toa the fact that all of this has been achieved compliance regime can be an elongated through fair but balanced regulation and arduous task for the regulator, the within a competitive that insurance manager, environment and the newly has made the domicile attractive to an licensed entity alike, but Nevis has made expanding range of customers from significant progress already in a relative an ever-widening geographical sphere. short space of time.

Parent companies from Europe, the Far Additional legislation is anticipated to East, the United States of America and further enhance the growing reputation the former Eastern-bloc have all made of the domicile on the international Nevis their domicile of for choice for as newa stage, and the future Nevis formations, whilst other companies have regulated insurance jurisdiction looks elected to re-domicile to the n jurisdiction very encouraging indeed. from other domiciles. With all that Nevis has to offer, that trend looks set to continue for the foreseeable future.

Nevis

of appeal), and a regulatory body that is communicative and responsive, and Beneficial Tax Regime you have a formula for success. This is As with most captive insurance clearly evidenced by the expansion and domiciles, onshore or offshore, it would development of Nevis as a credible and be naïve to believe that a beneficial tax regulated insurance domicile over the last regime was not a factor in the decisionthree years. making process for clients selecting their domicile. The fact that no Beneficial Tax Regime taxation is levied within the domicile As with most captive insurance domiciles, for licensed insurance companies that onshore or offshore, it would be naïve make underwriting profits must be an to believe that a beneficial tax regime advantageous factor in selecting Nevis as was not a factor in the decision-making the ultimate domicile of choice for the process for clients’ selecting their domicile parent company. of choice. Nevertheless, it should never Furthermore, no income tax, direct, be the primary or motivating factor, as or indirect tax shall be levied in Nevis tax rules around the world can be subject on transactions, contracts, securities to change, often at short notice, which or other dealings, profits or gains of a could feasibly undermine the economic registered insurer. No tax is levied on viability and existence of the captive if dividends or earnings attributable to that was the sole purpose in establishing shares or securities of the registered the entity in the first place. insurer.

There is also an exemption from However, any commercial enterprise stamp duty, and from all currency and looking to establish a new operation exchange control restrictions. should always evaluate the political, Nevertheless, tax levies should not geographical, and economic elements in be the primary or motivating factor, as advance of making that selection, and the tax rules around the world are subject to change, often at short notice, which could feasibly undermine the economic

Nevis

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IFC Review • 2010

Nevis - Fact File GENERAL OVERVIEW

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Eastern Caribbean, 200 miles south east of Puerto Rico.

Atlantic Standard Time, European Standard Time +1/ 0, Greenwich Mean Time -4 /-5.

12,106.

Charlestown.

Vance W. Amory International Airport.

English.

Eastern Caribbean dollar.

Stable democratic. +869.

English common law.

IBC and LLC formation and management, insurance, trust administration, and foundations.

TAX

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

None.

None for IBCs and LLCs. Local companies: 35%.

None.

For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies Minimum authorised capital Minimum share issue

US, euro, pound sterling.

None.

None.

TYPE OF ENTITY

Shelf companies Timescale for new entities Incorporation fees Annual fees

None.

24 hours.

US$220.

US$220.

DIRECTORS

Minimum number

Residency requirements

Corporate directors

Meetings/frequency

Three directors “except that where all the shares of a corporation are held by fewer than three shareholders, the number of directors may be fewer than three but not fewer than the number of shareholders”.

None.

Yes. Yes, held at a time and place as fixed by the company by-laws or as indicated by the board.

SHAREHOLDERS

ACCOUNTS

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

None.

Yes but restricted.

One. None.

Yes, held at a time and place as fixed by the company by-laws or as indicated by the board.

Annual return Audit requirements

No filing required.

None.

ACCOUNTS

OTHER

Registered office Domicile issues Company naming restrictions

Yes. Yes, re-domiciliation permitted.

Yes, cannot have the same name as an existing company.

www.ifcreview.com/Nevis

143

IFC Review • 2010

Seychelles

Seychelles: the Next Step in Wealth Protection

by Simon Mitchell, Seychelles Attorney-at-Law and Consultant to Mayfair Trust Group Limited, Seychelles

S

EYCHELLES HAS SUBSTANTIALLY

GROWN

as an international financial centre since the enactment of the International Business Companies Act 1994. Located in the northern Indian Ocean (GMT+4), Seychelles is an independent country within the Commonwealth, having gained independence from Great Britain in 1976. The tax-exempt IBC (a company incorporated under the International Business Companies Act 1994) has been a star performer for Seychelles, as demonstrated by evergrowing registration numbers over the last decade, including 13,751 new IBC incorporations in 2008 alone. Seychelles now has approximately 60 licensed international corporate service providers.

The success of the IBC, along with Seychelles’ increased offshore financial services business volumes, know-how and global profile, have combined to enable Seychelles to steadily develop more value-added areas of offshore business.

Unlike many ‘IBC jurisdictions’, Seychelles has developed a growing network of double taxation avoidance agreements (DTAs), which may be accessed by Seychelles tax resident companies. For example, Seychelles CSLs (companies incorporated under the Companies Act 1972 and issued with a special licence under the Companies (Special Licences) Act 2003), are regularly used to hold investments in China and Indonesia, in view of favourable Chinese and Indonesian tax relief afforded to Seychelles companies under its respective DTAs with these countries. Seychelles is also steadily building value-added business in the areas of trusts, limited partnerships and mutual fund structures.

The focus of this article, however, is on Seychelles’ newest financial services product – the foundation. The Seychelles Foundation Bill 2009 (the Act) has recently been published, and it is anticipatwww.ifcreview.com/Seychelles

ed that the law will be enacted into force

by November 2009.

Foundations have existed in parts of Europe since the Middle Ages, when they were originally only used for charitable or religious purposes. In modern times, foundations have increasingly been used for wealth management purposes, as pioneered in civil law jurisdictions such as Liechtenstein, Austria and Panama. Over the last five years, a number of common law jurisdictions have introduced foundation legislation, and the popularity of foundations continues to grow.

In contrast to a trust, which may only operate and own property through a trustee, a foundation is a separate legal entity (as is, for example, a company).

Once the founder of a foundation transfers assets to the foundation, those assets become the sole property of the foundation. Unlike the beneficiaries of a trust who have an equitable interest in trust assets, the beneficiaries of a foundation have no equitable interest in foundation assets. As neither the founder nor beneficiaries of a foundation have any ownership interest in foundation assets and as management and control of a foundation is typically with the foundation’s council (which may be located in a low tax or nil tax jurisdiction), a foundation is a highly useful entity for tax planning, asset protection, wealth management and ‘outside estate’ succession planning.

A Seychelles foundation is established by a written charter signed by one or more founders and on the issuance of a certificate of registration by the Registrar (the Seychelles International Business Authority) upon registration of the foundation under the Act. The sole document to be filed when applying for registration of a new Seychelles foundation is the foundation’s charter. A registration fee of USD200 is payable to the Registrar. An annual renewal fee of USD200 is due on the day before the foundation’s registration

anniversary date. A Seychelles foundation’s charter must state, inter alia, the name of the foundation, the name and address of the founder or founders, the initial asset endowment of the foundation, the objects of the foundation and particulars of the foundation’s registered agent and registered office in Seychelles. The names of the beneficiaries of the foundation are not required to be stated in the charter. Unlike other foundation jurisdictions, it is not mandatory for the names of the councillors of the foundation to be stated in the Seychelles foundation charter. This ensures a measure of privacy that other jurisdictions can not offer given that the charter is publicly accessible by search of the Registry.

Under the Act, the founder is the individual or corporate entity who subscribes their name to the charter establishing a Seychelles foundation acting either for themselves or on behalf of another and who endows that foundation with its initial assets. The broad definition allows for nominee founders.

A founder may reserve, in the foundation charter or regulations, to themselves or for other persons, various rights, including the right to approve investment activities of a foundation and the right to appoint or remove councillors, protectors or beneficiaries. A founder may be a foundation beneficiary but not the sole beneficiary. The founder of a Seychelles foundation may assign or transfer all or any part of their rights, powers and obligations as founder to such person or persons as the founder may determine.

While a foundation must have a charter, it may or may not choose to adopt regulations. However, a foundation will normally adopt regulations to ensure that matters relating to foundation beneficiaries and distribution entitlements remain private. A foundation’s regulations, unlike the charter, are not filed with the Registry and, therefore, are not publicly accessible.

Regulations may provide rules in respect

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IFC Review • 2010

of, inter alia, the regulation of the foundation council, the designation of beneficiaries and the distribution of assets to be made by the councillors of the foundation.

While a Seychelles’ foundation’s charter and regulations will usually be prepared in the English language, its charter and regulations may be written in any other language, in which case it shall be accompanied by a certified translation in the English or French language. The name of a foundation may also be expressed in any language, but where the name is not in the English or French language, a certified translation of the name in English or French shall be given to the Registrar. In such cases, the foreign name will be specified in the Registry-issued certificate of registration, together with the translated name in English or French, as the case may be.

A Seychelles foundation is required to have initial assets of a value of not less than USD1 or the equivalent thereof in any convertible currency. The initial assets may be endowed after registration of a foundation. A Seychelles foundation may own assets worldwide. However, the assets of a foundation shall not include any real estate or other property in Seychelles, except that a foundation’s assets may include, inter alia, shares, debentures or other interests in Seychelles IBCs, any interest in a Seychelles limited partnership, any interest as a beneficiary under a Seychelles trust, any interest as a beneficiary under another Seychelles foundation, any interest in a Seychelles mutual fund or funds in a Seychelles bank account.

A Seychelles foundation is exempt from Seychelles taxation on its income and is exempt from Seychelles withholding tax and stamp duty (except in relation to any permitted dealings in Seychelles real estate).

The objects of a foundation may be charitable, non-charitable or both, and may be to benefit a beneficiary or beneficiaries, or to carry out a specified purpose, or to do both. The objects of a Seychelles foundation shall include the management of its assets and income and the distribution thereof, as the council may determine pursuant to the charter or regulations, to the foundation’s beneficiaries or, in the case of a foundation which has a specified purpose or purposes, in fulfillment of that specified purpose or purposes. The objects of a foundation shall not include the carrying on of any activity which is unlawful, immoral or contrary to any public policy in Seychelles.

A foundation must also have a council, which manages the foundation and is re-

sponsible for administration of the foundation’s assets and carrying out the objects of the foundation. A foundation council is required to consist of one or more persons, which may be a natural or legal person. Non-resident councillors are permitted. A founder may be a councillor, but a founder cannot be a sole councillor.

In contrast to some jurisdictions, there is no mandatory requirement for a Seychelles foundation to have a licensed resident councillor. Obviously, however, from an onshore tax-planning perspective, and consistent with management and control from Seychelles, it will often be desirable to appoint councilors who are resident in Seychelles. The duties of a councillor include acting honestly and in good faith with a view to the best interests of the foundation. A councillor’s duties are owed only to the foundation and not to the beneficiaries.

A Seychelles foundation must also at all times have a registered office and a licensed registered agent in Seychelles. Additionally, a foundation may, but is not required to, have a protector, who may be a natural or legal person. A founder, beneficiary or councillor of a foundation may be appointed as a protector, but a sole councillor or a sole beneficiary cannot act as protector. Typically, a protector may be given limited veto power in that the protector’s prior approval will be required in respect of certain foundation decisions, such as, for example, the addition or removal of a beneficiary or councillor or approval of foundation investment activities.

Robust Asset Protection

The assets transferred to or otherwise vested in a Seychelles foundation shall: • be the assets of the foundation, with full legal and beneficial title; • cease to be the assets of the founder, once transferred to or otherwise vested in the foundation by or on behalf of the founder; and • in the case of a foundation with one or more beneficiaries, not become the assets of a beneficiary unless distributed to any beneficiary.

The Act contains strong foundation asset protection provisions. No transfer or other disposition of property to a foundation shall be void, voidable or otherwise be liable to be set aside by reference to a foreign rule of forced heirship or any other foreign law. Additionally and notwithstanding any foreign law to the contrary, a transfer of property to a foundation shall not be void,

voidable or otherwise liable to be set aside by reason of the founder’s bankruptcy or the liquidation of the founder’s property or in any claim against the founder by any creditor of the founder, provided that the Seychelles Supreme Court may, where it is proved beyond all reasonable doubt that the founder was insolvent or intended to defraud any person who was a creditor of the founder at the time when the founder transferred property to the foundation, declare that such transfer of property was void or voidable to the extent necessary to satisfy a proven claim of a creditor of the founder. The onus of proof in bringing such a claim rests with the creditor. The Act further provides that such a claim with respect to any property of a foundation shall not be made against a foundation and shall be barred absolutely on the expiry of two years from the date of the transfer of such property to the foundation.

Under the Act and notwithstanding any Seychelles or foreign law to the contrary, it shall be lawful for an instrument of transfer or other disposition, or for the charter or regulations of a foundation, to provide that any estate or interest in any property distributed by a foundation to a beneficiary shall not be alienated by bankruptcy, insolvency or liquidation or be liable to be seized, sold, attached, or taken in execution by process of law (ie on the basis of retention of title by the foundation). Additionally, the charter or regulations of a foundation may provide that any beneficiary shall forfeit his benefits or rights or potential interest under the foundation in the event that he challenges the establishment of the foundation, the transfer of any assets to the foundation, the foundation’s charter or regulations or any provision thereof or any decision of the councillors, any protector or the founder. Pursuant to the terms of a foundation’s charter, the founder is also able to limit, in accord with his or her wishes, the extent of a beneficiary’s entitlement to financial or other information relating to a foundation and its assets.

The Act provides for the continuation of foreign foundations in Seychelles and for continuation of Seychelles foundations overseas. The Act also provides the consolidation of two or more existing foundations into a new foundation and for the merger of an existing foundation into another existing foundation.

The Seychelles foundation is a robust yet versatile entity, offering strong asset protection features, ease of formation and administration, value for money and privacy. www.ifcreview.com/Seychelles

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IFC Review • 2010

by Mr Steve Fanny, Managing Director, Seychelles International Business Authority, Seychelles

T

HE WORLD OF OFFSHORE INVESTMENT IS CHANGING.

Since Seychelles established its first offshore legislation in 1994 there have been numerous events which are allowing Seychelles to enhance its position in the offshore world.

The current changes are radical. They have been inspired by the economic crisis of the major industrial countries of the world, which look now with envious eyes at the versatility and the popularity of offshore jurisdictions. Allegations that offshore centres are being used for tax evasion and money laundering purposes are exaggerated. The substance of these allegations can apply equally to any developed country; the non-existence of the level playing field is a subject which they prefer to overlook. But there is no doubt that the allegations will have an effect.

The current move by the United Kingdom (UK) tax authorities to require banks registered in London to supply the names and addresses of clients whom they know to have money in offshore accounts is unlikely to be the end of the witch-hunt.

Support by international centres for antitax evasion, anti-corruption and antimoney laundering activities seems not to be enough to satisfy developed countries’ hysteria. Ethical and balanced attitudes are www.ifcreview.com/Seychelles

now the initiative of countries like Seychelles which have the capacity and balance to see what is to the world’s advantage and which are not motivated by the need to grab money to reimburse the compensation made for incompetent banking.

Illogically, however, this intrusion by UK tax authorities will have a bad affect on all offshore jurisdictions and international investors will be less enthusiastic about investing internationally for fear of counter measures by the countries in which they are resident. On the other hand, the legitimate establishment of international norms and the fulfilment of offshore requirements with accepted international standards have done much to re-establish the reputation of offshore jurisdictions which operate with integrity.

Many industrial and trading countries do not have the financial facilities which they need to exploit their industry and productivity internationally; where they have manufacturing and productivity achievements which exceed the financial capabilities of their countries, international centres come into their own. Where the countries with industrial growth need international financial management and planning, because their own facilities are relatively unsophisticated, the use of offshore centres are thoroughly proper and

Seychelles

Seychelles: Accepting and Creating the Offshore Challenge

Seychelles

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IFC Review • 2010

beyond reproach.

Seychelles’ good reputation has been earned by careful and thorough legislation in the past. Since 1994, service providers in Seychelles have been providing international business companies, international trusts, special license companies and other vehicles for the international investor. Supporting the actual legislation establishing these vehicles has been a carefully constructed regulatory body of law.

The Anti-Money Laundering Law, originally enacted in 1996, was recognised as one of the most progressive offshore antimoney laundering laws in the world. It anticipated forfeiture of illegal funds and the application of the laws to all persons. Its measures were years in advance of European Union (EU) regulations which eventually had the same effect. This law has been brought up to date. Service providers are now subject to the International Corporate Service Providers Act where, through the Seychelles International Business Authority, regulation and compliance norms have been worked out and implemented in a spirit of cooperation between the practitioners and the regulators, and an understanding that nothing less than the best standards are acceptable internally and internationally. Proper scrutiny of offshore activities is now recognised as enhancing the reputation of an offshore centre as a well-regulated and proper jurisdiction in which confidence can be placed.

The initial legislation provided a firm base on which to make careful progress.

This progress has made it necessary to modify some of the standard legislation, as amendments to the International Corporate Service Providers Act, the International Business Companies Act and the Anti-Money Laundering Act in particular, have shown. New innovations include a Foundations Act to introduce private foundations into the armoury of Seychelles facilities. In recent years, international financial centres have been subject to closer scrutiny by developed countries that are anxious not to miss any taxation or other advantages which they can retrieve from persons within their jurisdictions who operate and invest globally, as they are expected by their governments to expand their businesses. As a result, legislation is now multi-dimensional; it is no longer appropriate to merely adopt an existing statute from another country given it could lead to trouble by taking on outof-date principles.

This has been shown by more recent legislation which is directed toward offering international facilities to established

groups of financial and banking organisations. A leading item of recent legislation has been the Securities Act, 2007, which is pioneering the idea of using Seychelles for dealing in securities. This is proving to be a major attraction in the expansion of Seychelles into the international financial fields to operate alongside its established connections for individual asset-planning.

The establishment of a securities market, intended both for marketing of shares in Seychelles and shares of companies registered elsewhere, is proceeding cautiously and carefully with subsidiary legislation in the form of regulations to ensure that successful applicants for licenses under the Act and subsidiary regulations can face any test applied to their integrity and to the market created in Seychelles.

Similarly, in conjunction with the development of a securities industry, the Mutual Funds and Hedge Funds Act, 2008, has introduced Seychelles as an attractive place in which to set up a mutual fund or a hedge fund. Mutual funds may either be unit trusts, investment companies or international partnerships. Registration follows the accepted principles applied in developed countries but, uniquely for an independent country, allows funds registered in selected countries an easier process of registration (in much the same way that mutual funds in an EU member state can take advantage of the cross-border facilities of the EU).

Another unique feature of this Act is that there may be private funds which are restricted to a limited number of investors, public funds commonly used by commercial mutual fund companies for investors generally and professional funds which are limited in their distribution.

This latter category covers hedge funds which, like hedge funds elsewhere, benefit from less detailed regulation on account of the fact that their distribution is limited to those professionals whose resources and knowledge does not call for the careful consumer protection exercised in respect of other funds.

Legislation on insurance is not new to Seychelles, but with the changing international use of international insurance, a new Insurance Act 2008 has opened up the market to insurers, agents, brokers and representatives. Each of these categories has been closely analysed and separate registration and regulatory regimes now apply to each. The Insurance Act and its regulations demonstrate that, as with the other introduction of funds and securities, the ultimate concern is with investors’ safety whilst, at the same time, making

the registration and regulatory processes straightforward and basing them upon practical criteria.

These new activities cannot exist in isolation and, accordingly, a careful selection of partners for double taxation treaties is taking place to ensure the proper apportionment of taxation between Seychelles and its treaty partners, thus enabling the flow of funds to pass internationally without incurring tax penalties. The intention is that funds may flow through Seychelles for the advantage of growing expertise between Seychellois and expatriate advisers without suffering unduly from double taxation. Also, it may deflect undue criticism that the attraction of Seychelles is to give rise to opportunities which are unlawful or at least unethical according to international laws.

Such progress cannot be made rapidly.

It requires detailed administration, innovation and thorough planning. Comprehensive law, which is understood and administered to enhance the reputation of Seychelles, is a goal recognised by government administrators and practitioners.

Relevant to this is the expansion of the capabilities of professional practitioners and other service providers in Seychelles.

The expansion of the facilities and accompanying legislation is undertaken with the benefit of a highly educated population in mind. Post-graduate legal and financial training has been undertaken in the main investment centres and the benefit of the latest practical and academic training is now vital to the country.

At the same time, it is recognised that expanding in the international financial world requires management to have indepth cultural appreciation when dealing with these innovations. Accordingly, the Seychelles Institute of Management has embarked upon a long-term educational plan to develop knowledge and understanding of the fundamentals of offshore finance. Increased competency in Seychelles will lead to international professional qualifications to supplement the academic post-graduates already in place.

The development of Seychelles is encapsulated in the expansion of its international financial activities and the manner in which it gives depth to the opportunities offered in a global market.

Seychelles’ reputation is utmost in mind amid these developments, however, knowing its rivals will be keeping a close eye on proceedings here. This scrutiny, and the challenges of developed countries and international agencies, Seychelles welcomes with open arms. www.ifcreview.com/Seychelles

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IFC Review • 2010

Seychelles - Fact File

Location Time zone Population Capital Airport(s) Language Currency Political system

International dialling code Legal system Centre’s expertise

Indian Ocean.

Greenwich Mean Time +4.

87,000.

Victoria.

Seychelles International Airport.

English, French, Creole.

Seychelles rupee.

Seychelles is an independent republic, a multi-party democracy and a member of the Commonwealth. +248.

Hybrid modelled based on English and French law.

International Business Company (IBC) Companies (Special Licence) (CSL).

TAX

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

None.

IBC: exempt. CSL: 1.5% of worldwide taxable income.

None.

For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies Minimum authorised capital Minimum share issue

IBC and CSL: all major convertible currencies.

IBC: US$1. CSL: No minimum.

IBC: US$1. CSL: minimum 10% of authorised capital.

TYPE OF ENTITY

Shelf companies Timescale for new entities Incorporation fees Annual fees

IBC: Yes. CSL: No. IBC within 24 hours; CSL within five working days.

IBC: US$100. CSL: US$1,200.

IBC: US$100. CSL: US$1,000.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

IBC: one. CSL: two.

IBC: no. CSL: no.

IBC: yes. CSL: no.

IBC: worldwide and no minimum. CSL: worldwide and one.

SHAREHOLDERS

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

IBC: To service providers. CSL: Confidential filing with the Authority.

IBC: registered bearer shares only. CSL: no.

IBC: one. CSL: two.

IBC: no. CSL: no.

IBC: worldwide (no AGM requirement). CSL: worldwide (annual AG M).

ACCOUNTS

Annual return Audit requirements

IBC: no. CSL: yes.

IBC: no. CSL: yes.

OTHER

Domicile issues

Company naming restrictions

www.ifcreview.com/Seychelles

IBC: tax non-resident. CSL: tax resident.

In line with global norms, prohibited words include, for example, ‘bank’, ‘building society’, and the registry has discretion to reject names that are indecent, offensive or misleading, etc.

Seychelles

GENERAL OVERVIEW

148

Singapore

IFC Review • 2010

Singapore: Leading the Way to Recovery

by Angela Nicolson, General Manager, Asiaciti Trust Singapore Pte Ltd, Singapore

S

INGAPORE’S

GOVERNMENT

has focused its attention on providing tax incentives to businesses in these difficult economic times. Early signs are that these incentives are effective and helping to lead the way to Singapore’s recovery. Various industries have benefitted from these tax incentives but none more than the funds management industry. This industry is a particular focus for the Singapore government as it continues its long-term objective to encourage its financial services industry, especially in relation to attracting high net-worth individuals.

Corporate Tax Rate

The corporate rate of tax has been reduced from 18 per cent to 17 per cent.

This lower rate, coupled with the territorial and remittance based tax system, various tax incentives (including 75 per cent exemption on the first SGD10,000 and 50 per cent exemption on the next SGD290,000), 60 double tax treaties and various free trade agreements, make Singapore a very attractive jurisdiction.

The rate is now very close to the current Hong Kong tax rate of 16.5 per cent.

Exemption for Remittance of Foreign-Source Income

As mentioned above, Singapore has a territorial and remittance based system of taxation. This means that only Singapore-sourced income and foreign-

sourced income that is actually remitted into Singapore is taxable. However, most foreign-sourced dividends, branch profits and service income are still exempt even if remitted to Singapore where the company is a Singapore resident company and the headline rate of tax in the country from which the foreign income has been paid is at least 15 per cent. Note, however, that the headline rate includes both the relevant company tax rate and the dividend withholding tax rate.

In an active move to further encourage the remittance of foreign-sourced income into Singapore all foreign income earned prior to 22 January 2009 and remitted between 22 January 2009 and 21 January 2010 will be exempt from tax in Singapore. It is hoped that this exemption will either be extended or retained on a permanent basis.

To note, in respect of Singapore resident individuals, foreign-sourced income (other than partnership income) is always exempt from tax in Singapore, even when it is remitted back to Singapore.

Limited Partnerships

Limited Partnership (LP) legislation was passed in late 2008 and provides another alternative vehicle that is both cost effective and flexible when compared to the Singapore Company. Both LPs and Limited Liability Partnerships (which were introduced several years ago) are good

alternatives to the Singapore non-resident company. There are some significant advantages of the Singapore LP over other jurisdictions including the ability of the limited partner to withdraw its contribution if certain conditions are satisfied.

A Singapore LP has to have at least one limited partner and one general partner.

There is no requirement for any of the partners to be resident in Singapore. A local manager is required to be appointed if all the general partners are not resident in Singapore.

The general partner is responsible for the day-to-day management and operation of the LP and has liability for the debts and obligations of the LP to the extent that the LP cannot pay those liabilities. The general partner can be an individual, but the use of a corporation can minimise the effects of unlimited liability.

It is important that the limited partners do not take part in the management of the LP, as if they do they could lose their limited liability status and be treated as general partners.

For tax purposes, the Singapore LP is treated as a partnership and is not taxed at the LP level. The normal Singapore tax rules apply ie as only Singaporesourced income and foreign income that is remitted into Singapore is taxable at the partner level.

Funds Management

The Singapore LP structure is considered www.ifcreview.com/Singapore

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IFC Review • 2010

is well placed to take advantage of the improving world economy and attract such foreign funds to Singapore.

Taxation Information Exchange Agreements (TIEAs)

Singapore, along with many other countries, has been targeted by the OECD to comply with their Article 26 in relation to the exchange of taxation information. Singapore currently has 60 double tax treaties (with the notable exception that it does not have a double tax treaty with the United States of America) but a lot of these treaties are quite old and have been negotiated using an earlier model of Article 26.

Singapore has agreed to progressively renegotiate its current double tax treaties to allow for this standard Article 26 clause or to actually enter into separate TIEAs. Singapore has currently signed (but not yet ratified) the following TIEAs: • The Netherlands; • Denmark; • United Kingdom; • Belgium.

In addition, New Zealand has negotiated new double tax treaties that in-

corporate the new standard clause on the exchange of tax information, as well as enhancing current double tax treaty provisions, including lowering the withholding tax rates on dividends, interest and royalties.

Singapore has ensured through its domestic taxation laws that the request for tax information from foreign governments is handled in a consistent manner and that ‘fishing expeditions’ are not entertained. Various safeguards have been put into place, including requiring a High Court Order before the Singapore tax authorities have the power to request information from either banks or trust companies. To apply for a High Court Order there must be a written authorisation given by the Attorney-General.

The High Court Order will not be issued if deemed contrary to public interest or if the information is protected by legal privilege.

It is generally considered that Singapore’s approach is a well-considered balance between the new international standards on the exchange of taxation information and the taxpayer’s need for confidentiality and certainty.

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Singapore

especially suitable for private equity and fund management business as it allows passive investors to invest and obtain limited liability.

In April 2009, the Monetary Authority of Singapore issued a circular providing detail of the Enhanced Tier Fund Tax Incentive Scheme (the Scheme), which applies to funds of a minimum size of SGD50m. The Scheme provides tax exemption for the investment fund itself. There is also a 10 per cent concessionary tax rate for approved fund managers, with an even lower rate of five per cent for Shari’a compliant activities.

Given the suitability of LPs to this type of business, it has been viewed favourably that the Circular also announced that fund vehicles can now be set up as LPs. The incentive conditions are applied at the partnership level rather than the level of each partner, potentially making it easier to satisfy all the conditions to be granted the tax exemption. It is widely held that allowing the use of LPs will save both time and money for foreign fund management groups who wish to set up operations in Singapore. As such, Singapore

Singapore

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IFC Review • 2010

Singapore - Fact File GENERAL OVERVIEW

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

South-East Asia.

Greenwich Mean Time + 8.

4,800,000.

Singapore.

Changi International Airport.

English, Malay, Mandarin and Tamil.

Singapore dollars.

Democracy. +65.

Based on English common caw.

Financial services, international banking,international holding companies, captive insurance, fund management, trustee services.

TAX

Personal Income tax Corporate income tax Exchange restrictions Tax information exchange agreements

0–20%.

17%.

No. For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted Currencies Minimum authorised capital Minimum share issue

All currencies.

No authorised capital.

One share of no par value.

TYPE OF ENTITY

Shelf companies Timescale for new entities Incorporation fees Annual fees

No – but companies can be incorporated within one day.

One day turnaround. $300 (Singapore dollars).

No fixed annual fee – nominal fees (S$20) for filing of various returns.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

One. At least one director.

Not permitted.

None, unless required by the company.

SHAREHOLDERS

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Yes. Not permitted.

One. Yes. Annual.

ACCOUNTS

Annual return Audit requirements

Yes. Yes, unless the company qualifies for audit exemption.

OTHER

Registered office Domicile issues Company naming restrictions

Singapore.

Re-domiciliation is not permitted.

Names of sensitive nature or similar to statutory boards or government departments are not permitted. Names indicating activities related to banking, trust and certain activities require licencing or prior approval of certain statutory boards.

www.ifcreview.com/Singapore

151

IFC Review • 2010

St Vincent and The Grenadines

Black, White and Grey Lists: Update on St Vincent and the Grenadines’ Progress on its OECD Grey-Listed Status

by Sharda Sinanan-Bollers, Executive Director, International Financial Services Authority of St. Vincent and the Grenadines, SVG

S

T VINCENT AND THE GRENADINES (SVG) was ‘grey-

listed’ in April 2009 by the Organisation for Economic Cooperation and Development (OECD), signifying that it is a jurisdiction which has ‘committed to the internationally agreed tax standard but has not yet substantially implemented’ its commitment.

Numerous other Caribbean countries, including all the countries of the Organisation of Eastern Caribbean States (OECS), were also ‘grey-listed’.

At the time, Barbados was the only Caribbean country ‘white-listed’ by the OECD as Barbados had been involved in establishing tax treaties with other countries for the past several years.

SVG is presently described as a ‘tax haven’ as a direct result of its present OECD ‘grey-listed’ status, and this is clearly a matter of concern for the jurisdiction. SVG objects to such negative labelling as past experience has illustrated that the stigma of such nomenclature is difficult to eradicate.

An example of this is that in 2003, SVG was removed from the ‘black lists’ of the Financial Action Task Force and the OECD, yet the injury to SVG’s reputation arising out of these listings lingers to date in certain international financial circles, making it difficult or in some cases impossible for SVG-licensed entities to conduct business with some www.ifcreview.com/SVG

international entities. This is the dire reality for a developing, smaller nation with an emerging and thus tenuous financial reputation.

SVG has therefore been making arduous efforts to become delisted and, in doing so, must abide with OECD stipulations for delisting.

The OECD has indicated that ‘grey-listed’ countries, such as SVG, can demonstrate their commitment to implement the internationally agreed tax standards with respect to the exchange of tax information, by establishing tax information exchange agreements (TIEAs) with other countries. A minimum number of 12 TIEAs with other countries may enable SVG to be removed from this ‘grey list’.

The OECD has however emphasised that each of these 12 agreements must be qualitative, so that merely having 12 such agreements numerically would not be sufficient for de-listing purposes, if in substance each does not accord with the OECD suggested template for such agreements.1 By 31 March 2010, countries on the ‘grey list’ which have made no progress or insubstantial progress will be dropped to the ‘black list’ and are likely to be subjected to the imposition of sanctions by the OECD. With this virtual Sword of Damocles looming over the reputation of SVG, it is no wonder

that for the past several months SVG has been involved in extensive bilateral negotiations with the OECD and other countries in order to obtain TIEAs. These negotiations are involved and time consuming due to the ‘queue’ of other ‘grey’ and ‘black-listed’ countries also pursuing the establishment of TIEAs, and due also to the lengthy bureaucratic steps involved before the larger OECD countries can complete the execution of a TIEA. SVG therefore acknowledges with appreciation the role which the Netherlands has initially played in assisting in multilateral negotiations with other participating countries on SVG’s behalf.

The Netherlands had volunteered its services to the OECD in what is referred to as the ‘Southern Caribbean Project,’ to assist smaller states in obtaining TIEAs with the larger nations – in pragmatic recognition that it would be difficult for the smaller states to do so themselves.

To date, the results of SVG’s efforts have been positive as the country has made significant progress in establishing TIEAs and is in a strong position to be removed from the ‘grey list’, according to Dr. the Hon Ralph E. Gonsalves, SVG’s Prime Minister and Minister of Finance.

As at January 2010, SVG has already established nine TIEAs with the following countries:

St Vincent and The Grenadines

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IFC Review • 2010

• Aruba; • Austria; • Belgium; • Denmark; • Ireland; • Liechtenstein; • the Kingdom of the Netherlands; • the Netherlands Antilles; and • the United Kingdom of Great Britain and Northern Ireland.

SVG is also involved in negotiations for the establishment of TIEAs with: • Australia; • Germany; • New Zealand; • Sweden; • Norway; • Finland; • Iceland; • the Faroes; and • Greenland.

Seven TIEAs in relation to the above countries have already been initialled as accepted by the respective countries and SVG. SVG is also pursuing a TIEA with France through an offer from the World Bank to assist the OECS countries in pursuing TIEAs. Dates for the completion of these TIEAs have not yet been decided, however all are targeted

for completion on or before 31 March 2010.2 Since September 2009, St. Vincent and the Grenadines has been utilising its Ambassadors and key contacts stationed abroad to sign these agreements on its behalf so as to curtail the costs of the Minister of Finance’s attendance for such signing. A TIEA was signed with Belgium in Brussels, by OECS Ambassador H.E. Shirley SkerrittAndrew, and the services of SVG Ambassador to the United States, H.E. La Celia Prince, were also utilised to sign TIEAs with the Netherlands, Aruba and Denmark, on the country’s behalf. St. Vincent and the Grenadines’ Honorary Consul to Austria, Dr. Walter Schoen, signed a TIEA with Austria, and Mr. Bryan Jeeves, C.M.G, O.B.E., signed with Liechtenstein on St. Vincent and the Grenadines’ behalf. A recent TIEA was also concluded with Ireland on 15 December 2009 via courier service, and the latest TIEA was signed in London on 18 January 2010 by Mr. Cenio E. Lewis, High Commissioner for St. Vincent and the Grenadines, with the United Kingdom of Great Britain and Northern Ireland, on behalf of SVG.

Based on the results of SVG’s efforts thus far with TIEAs which have been established and are presently being pursued, there is now a clear and legitimate expectation on SVG’s part that it would be removed from the ‘grey list’ by the OECD’s stipulated deadline of March 2010. It is suspected, however, that notwithstanding the reward of a future ‘white listing,’ the next ominous challenge would be for countries, including SVG, to be able to prove to the OECD how these TIEAs are being ‘effectively implemented.’

In the interim, the position remains that the country’s removal from the OECD ‘grey list’ would be welcomed by all players in its local and international financial industry, and such removal would undoubtedly be in the best interests of the reputation of the jurisdiction.

1. As per Mr. Jeffrey Owens, Director, Centre for Tax Policy and Administration, OECD, at the 7th Annual Offshore Alert Financial Due Diligence Conference, April 27, 2009, Miami, Florida.

2. ie confirmed as targeted by SVG for completion.

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www.ifcreview.com/SVG

153

IFC Review • 2010

St Vincent and The Grenadines - Fact File Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Eastern Caribbean.

GMT – 4.

109,022.

Kingstown.

Five domestic; one international (completion due 2012).

English.

Eastern Caribbean Dollar (EC$).

Parliamentary democracy. +1 784.

English common law with local statutes.

IBCs, Trusts, Funds.

TAX

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

N/A. Nil, but company may irrevocably opt to pay 1% tax .

None.

For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies Minimum authorised capital Minimum share issue

Any currency.

No minimum.

No minimum.

TYPE OF ENTITY

Shelf companies

Timescale for new entities

Incorporation fees

Annual fees

Yes. 24 hours.

US$125 plus an annual fee of US$100 reduced by one twelfth, depending on month of formation.

US$100.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

One, where company is authorised to issue shares. Nil otherwise.

None.

Yes. As directors decide by-laws and articles.

SHAREHOLDERS

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Optional by the company.

Permitted only if articles expressly allow. Share certificates are immobilised.

One, where company is authorised to issue shares. Nil otherwise.

No. As members agree in the articles or bylaws.

Annual return Audit requirements

Not required.

Not required.

ACCOUNTS

OTHER

Registered office Domicile issues Company naming restrictions

www.ifcreview.com/SVG

Local registered office required.

Companies may re-domicile in or out of SVG. Yes - a few restrictions apply- see section 9 of Act.

St Vincent and The Grenadines

GENERAL OVERVIEW

154

Switzerland

IFC Review • 2010

Switzerland to Adopt OECD Exchange of Information Standard

by Walter Streseman, Vistra SA, Switzerland

F

OR SWITZERLAND, THE YEAR 2009 as regards taxation

issues was clearly overshadowed by the political pressure to adopt Organisation of Economic Cooperation and Development (OECD) exchange of information standards in order to be removed from that organisation’s ‘grey list’. In 2010 it will certainly be the Swiss people who will have the last word.

On 27 November 2009, the Swiss Federal Council adopted five dispatches on the revised double taxation agreements (DTAs). It will request parliament to approve these dispatches. The revised DTAs meet international standards relating to administrative assistance in tax matters. In a significant move, which might actually delay the implementation of some of these new treaties, the Federal Council stated that it is of the opinion that they should all be made subject to an optional referendum to be voted by the Swiss people.

The dispatches on the revised DTAs concern the United States (US), Denmark, France, Mexico and the United Kingdom (UK) in an initial batch. There is no need for a dispatch on the DTA with Spain which counts as a signed agreement. The current agreement contains a most-favoured nation clause which will be applied as soon as Switzerland agrees a more far-reaching provision on the exchange of information with another European Union (EU) country. This clause was activated when the DTA with Denmark was signed. The dispatch on the revised DTA with Denmark also covers the inclusion of the Faroe Islands. This is why there are only 10 dispatches for the 12 DTAs signed up

to now with the OECD standard on administrative assistance.

All of the revised DTAs contain an extended administrative assistance clause in accordance with Article 26 of the OECD Model Convention, thereby implementing the Federal Council decision of 13 March 2009 on the new agreements policy. The Federal Council is expected to submit a second batch of five further agreements to Parliament for approval by the end of January 2010.

Initially, the Swiss Government intended to submit only one revised DTA for an optional referendum.

However, political pressure from Parliament has persuaded the Federal Council to conclude and recommend that all new DTAs should be subject to an optional referendum. Therefore, any formal ratification by the Swiss Parliament is not expected to take place before spring 2010.

In practice this means that any new DTA will only be applicable as at 1 January 2011. Nonetheless, some DTAs (for example the one with France) will already enter into force on 1 January 2010 even though the actual application would need to wait until 2011, pending ratification by both countries. The point in time of entry into force depends upon the agreement reached.

Switzerland was removed from the OECD ‘grey list’ on 25 September 2009 following the signature of its 12th DTA with Qatar.

The adoption of the OECD standard on administrative assistance in tax matters, according to Article 26 of the OECD’s Model Tax Convention, means that Switzerland shall no longer distinguish between

tax fraud and tax evasion.

In this context it is important to note that this new practice will only apply to future DTAs. As no Swiss laws will change, only the provisions of the relevant DTA are authoritative.

Therefore, any future administrative assistance by Switzerland for tax evasion may only take place according to the future provisions of new (re)negotiated tax treaties. International standard practice forbids new DTAs from taking retroactive effect.

In accordance with the provisions of said Article 26, the new treaties will not provide for any automatic exchange of information, which Switzerland and other financial centres (including the US) formally reject. Administrative assistance will only be provided upon formal written request of a contracting state and only if there is justified suspicion that tax evasion or tax fraud has actually occurred.

‘Fishing expeditions’ will not be allowed and the information-requesting state will need to mention detailed evidence, such as the name of a specific bank and its location.

Furthermore, it should be emphasised that a fundamental principle underlying Article 26 of the OECD Model Convention is that “in formulating their requests, the requested state should demonstrate the foreseeable relevance of the requested information.

In addition, the requesting state should also have pursued all domestic means to access the requested information except those that would give rise to disproportionate difficulties.”

Although it is far from certain which treaties the Swiss Parliament or population would subject to a www.ifcreview.com/Switzerland

referendum, clearly the new treaties signed with the US and France appear to be prime candidates.

Observers in recent months have especially focused on the attempts by the US and Switzerland to resolve the tax evasion strategies for US clients as devised and implemented by UBS. On 19 August 2009, Switzerland and the US signed an agreement on the request for information from the Internal Revenue Service of the US regarding UBS. According to the criteria set out in the annex to the agreement (as published in November 2009), the US treaty request covers the following persons where there is a reasonable suspicion of ‘tax fraud or the like’: • US-domiciled clients of UBS who directly held and beneficially owned undisclosed (non-W-9) custody accounts and banking deposit accounts in excess of CHF 1 million at any point in time between 2001 and 2008; • US persons (irrespective of their domicile) who beneficially owned offshore company accounts established or maintained between 2001 and 2008.

Further investigations are ongoing in both categories to establish whether ‘tax fraud or the like’ has been committed under the terms of the tax treaty.

The term ‘tax fraud or the like’ is defined in greater detail in the agreement on the UBS affair, extending to fraudulent conduct (eg constructing a scheme of lies or submitting incorrect or false documents) that might result in the concealment of assets and the underreporting of income. Where such conduct is proven, the qualifying threshold under the US treaty request is lowered to include holders of accounts containing assets of CHF 250,000 or more.

In addition to cases of conventional ‘fraudulent conduct’, Switzerland may also be asked to obtain information on continued and serious tax offenses.

According to the annex, this refers to accounts that generated revenues of more than CHF 100,000 on average per year for a period of at least three years, where such revenues were not reported to the IRS. It should be noted that the legal framework for the annex supports the existing DTA between Switzerland and the US, thus ensuring that Swiss law is preserved. For instance, all procedural laws and legal remedies continue to apply.

This also means that clients can lodge a complaint with the Swiss Federal Administrative Court against any www.ifcreview.com/Switzerland

negative rulings of the Swiss Federal Tax Administration if they are of the opinion that the court did not respect the relevant provisions. Any decision on whether to hand over client data therefore remains under the jurisdiction of a Swiss court.

However, the August Agreement is a special ‘ad hoc’ state treaty relating to the UBS matter and should not be confused with the new Protocol to the existing income tax treaty which Switzerland and the US signed in September 2009. The main issue was of course the extension of the exchange of information clause.

As in all other negotiated DTAs, information will only be exchanged based on specific requests. The requesting state has to supply sufficient information to identify the person under examination, the period of time for which information is requested, the tax purpose, sufficient information on the holder of the information and some other information (see Art. 4 of the new protocol amending Paragraph 10 of the existing Protocol). So-called ‘fishing expeditions’ are excluded. The new exchange of information scheme immediately enters into force as of 23 September 2009.

Switzerland and France signed a new protocol to the existing income and capital tax treaty on 27 August 2009.

Considerable discussions and commentary surrounded the publication of this treaty, as it does not make a specific reference to the requirement for including the bank’s name in an information request.

This prompted the Swiss Government to issue a communiqué stating that so-called ‘fishing expeditions’ remain out of the question, even those from France. In a request for administrative assistance, the taxable person concerned must be able to be clearly identified and, in the case of banking information, the respective bank must be able to be clearly identified.

Future requests for administrative assistance from France must therefore include a specific reference to a specific bank even though in this regard a different wording was chosen in the renegotiated DTA with France as compared to other DTAs. The wording chosen by France comes from the tax information exchange agreement (TIEA) drawn up by the Organisation for Economic Cooperation and Development (OECD). This wording was already used by France in agreements with other countries.

As a result, in a French request for administrative assistance the name of the bank is not absolutely necessary, provided the bank can be identified though other information which clearly indicates which bank is involved. Information of this nature can be found, for example, in an IBAN or SWIFT code (international bank account number) to which a bank is clearly assigned.

The Swiss Finance Ministry further stated that “administrative assistance with France will thus not deviate in practice from administrative assistance which Switzerland has agreed with other countries” and that “the Federal Tax Administration is not able to provide administrative assistance to a foreign tax authority if the bank is not clearly identified in the request for administrative assistance.”

At this point in time it is impossible to forecast a likely outcome of any popular referendum on any of these signed DTAs, although the one with France is certain to generate political passions. In anticipation of further pressure on banking secrecy and client confidentiality, the Swiss Banking Association has proposed a future withholding tax to be levied in Switzerland, not just on savings income as is presently the case.

The Association, at its annual meeting in Zurich (17 September 2009) suggested that the money collected would be transferred to the respective countries’ tax authorities without disclosing the name of the bank customer. The proposal (called ‘Rubik’) would extend withholding tax on EU citizens to include dividend income generated by stocks and mutual funds, as well as capital gains.

In accordance with the EU’s Taxation of Savings Income Directive, Switzerland has already levied a withholding tax on EU citizens since 2005, but it covers only income from certain types of investment, principally from bonds.

According to the proponents of Rubik, the proposal “would generate tax revenues while respecting the privacy of bank clients and it would represent an efficient alternative to a system of automatic information exchange.”

The Swiss Government has promised to closely study this proposal. Unofficial reactions from European countries so far have been mixed and any specific advances will certainly be linked to the EU’s own progress in articulating a revised Savings Income Directive.

Switzerland

Switzerland

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IFC Review • 2010

Switzerland

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IFC Review • 2010

Switzerland - Fact File GENERAL OVERVIEW

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

East of France, south of Germany, north of Italy.

Central Time Zone.

7,300,000.

Berne.

Zurich, Geneva, Basel, Lugano.

German, French, Italian.

Swiss Franc.

Federal democracy. +41.

Civil (Roman) law.

Finance, banking, fiduciary.

TAX

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

Depending on canton.

Federal rate 8.5%; cantonal rates vary.

No. For full details, please go to www.ifcreview.com/TIEA.

SHARE CAPITAL

Permitted currencies Minimum authorised capital Minimum share issue

Swiss franc.

Corporations: CHF100,000.

CHF50,000.

TYPE OF ENTITY

Shelf companies Timescale for new entities Incorporation fees Annual fees

No. 10 days.

CHF6,000.

CHF6,000 director fees.

DIRECTORS

Minimum number Residency requirements Corporate directors Meetings/frequency

One. One director or manager.

No. Minimum of one per year.

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

No. Yes. One. No. Minimum of one per year.

Annual return Audit requirements

Yes. Depending on activity and number of employees.

SHAREHOLDERS

ACCOUNTS

OTHER

Registered office Domicile issues Company naming restrictions

Yes. No. Partial.

www.ifcreview.com/Switzerland

Professional Pages

IFC Review • 2010

ANGUILLA

Counsel Limited P.O. Box 727 1st Floor Hansa Bank Building Landsome Road, The Valley Anguilla, BWI AI-2640

Tel: (264) 498 3800 Fax: (264) 498 3805 admin@counsellimited.com www.counsellimited.com Contacts

Fiona Curtis fcurtis@counsellimited.com Rita D. Ible rible@counsellimited.com Services

AUSTRIA

Bilanz-Data Wirtschaftstreuhand GmbH Schwarzenbergstraße 1-3/14a, 1010 Vienna, Austria Tel: +43 1 516 120 Fax: +43 1 516 1214 baier@austrian-taxes.com www.austrian-taxes.com

Contact

Erich Baier, MBA, LL.M. (International Tax Law), Certified Tax Advisor Services

For more than 20 years, we have been providing a full range of professional, corporate, accounting and management services to our offshore client companies. We specialise in implementing carefully planned international structures.

We have developed a reputation for professionalism through the high quality of service we offer our clients.

• Corporate and individual tax-planning • Corporate reorganizations • Inheritance and gift tax-planning • Tax litigation • Working out and obtaining advance tax rulings from the tax authorities • Nominee and trustee services • Corporate services: Establishing and managing of trading companies, royalty companies, holding companies, private foundations

ANTIGUA

BELIZE

Global Bank of Commerce, Ltd

Belize Corporate Services Ltd

Global Commerce Centre, Old Parham Road, P.O.Box W1803, St. John’s, Antigua, West Indies

21 Regent Street, 2nd Floor, P.O. Box 364, Belize City, Belize, Central America

Tel: +1 268 480 2240 Fax: +1 268 462 1831 customer.service@gbc.ag www.globalbankofcommerce.com

Tel: +501 227 2567/1591 Fax: +501 227 7018 corporate@belizebank.com www.belizecompanies.com

Contacts

Contacts

Winston St. Agathe, General Manager Brian Stuart-Young, Chief Executive Officer Services

International corporate and personal banking services provided by the oldest financial institution in the jurisdiction, licensed since 1983, with full service offices.

• Wealth management • Multi-currency accounts • Trust and IBC formation • Alternative investments • Online banking • Visa credit, debit, prepaid cards • e-commerce • Electronic funds transfer services

Christopher Coye, Director International Financial Services Ava Lovell, Operations Manager Services

BCSL provides a full range of professional business services including, but not limited to: offshore company formation and maintenance services; trust services; specialized virtual office services; corporate administration and bookkeeping services. Value, speed and quality of Service have proven to be the hallmark of our success and remains an integral component of our business strategy.

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British Caribbean Bank International Limited 21 Regent Street, 4th Floor, P.O. Box 364, Belize City, Belize, Central America Tel: +501 227 0697/1548 Fax: +501 227 0983 services@bcbankinternational.com www.bcbankinternational.com Contacts

Christopher Coye, Director (International Financial Services) Lizanni Cuellar, Operations Manager Services

Foreign currency bank accounts; Visa/MasterCard International, credit cards; international Visa debit cards; Visa prepaid Cards; online securities trading and brokerage services; US dollar credit facilities; online banking; e-commerce merchant acquiring services.

Caye International Bank P.O. Box 11, Coconut Drive, San Pedro, Ambergris Caye, Belize, Central America

Tel: +501 226 2388/3083 Fax: +501 226 2892 services@cayebank.bz cibl@btl.net www.cayebank.bz Contacts

Tricia Villanueva, Marketing Officer Joy Flowers, Executive Vice President Services

‘Global Private Banking for the Sophisticated Clientele’.

The international service professional’s choice for private banking, asset management and investment services.

Direct and associate relationships with a full range of traditional and non-traditional services, multiple currency accounts and online banking.

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Professional Pages

BELIZE CONTINUED

Bay Trust Corporate Services Limited P.O. Box 2130 7 New Road Belize City Belize

Tel: + 501 223 1756 Fax: + 501 223 0838 E-mail: karen@baytrustbelize.com Contact:

Karen Longsworth Services:

We provide trust, companies and insurance establishment and management services to practitioners, banks, and intermediaries.

Orion Corporate & Trust Services Ltd. No. 5 Cork Street, P. O. Box 1708 BELIZE CITY BELIZE

Tel: +501 223 6910 Fax: +501 223 6623 orion@btl.net or info@orionibc.com www.orionibc.com Contacts

Christine Ping, Paula Jonch, Brian Escalante

International Business Companies Registry of Belize Suite 201, Marina Towers, Newtown Barracks, Belize City, Belize

Tel: +501 223 5108/223 5120 Fax: +501 223 5124 ibc@btl.net www.ibcbelize.com Contacts

Katherine Haylock, Deputy Registrar Senior Registration Officers: Santiago Gonzalez, Beverly Gallaty Services

Incorporation of Belize international business companies (IBCs) and limited duration companies (LDCs) inclusive of all related services. Same day registration. Competitive Registry Fees. Registration in any language.

Highly qualified professional services.

Online name checks and name reservations.

IFC Review • 2010

BERMUDA

Winchester Global Trust Company Limited A member of The CACEIS Group Williams House, 20 Reid Street P.O.Box 3396, Hamilton HM PX, Bermuda.

Tel: + 1 441 296 2000 Fax: + 1 441 296 1199 trust@wgt.bm www.caceis.com

The Bermuda Stock Exchange Washington Mall, Phase 1, 3rd Floor, Hamilton, HM 11, Bermuda, P.O. Box HM 1369 Hamilton, Bermuda HMFX

Tel: +1 441 292 7212 Fax: +1 441 292 7619 info@bsx.com www.bsx.com Contacts

Gregory Wojciechowski, CEO James McKirdy, Chief Compliance Officer

Contacts

William F Maycock, President David G Goodwin, Vice President Services

Licensed and supervised by Bermuda Monetary Authority to provide a wide variety of fiduciary services.

For individuals: discretionary and non-discretionary trusts; purpose trusts; asset protection trusts; charitable trusts For corporate clients: master trusts; business trusts. Winchester through its management company also offers incorporation, administration, nominee and private client services.

BRITISH VIRGIN ISLANDS

KPMG Crown House 4 Par-la-Ville Road Hamilton HM Bermuda

Tel: +1 441 295 5063 Fax: +1 441 295 9132 kpmg@kpmg.bm www.kpmg.bm Contact

Craig Bridgewater Services

KPMG in Bermuda provides audit, tax, and advisory services to the Investments industry. Personalized service, in-depth industry experience and a global network of resources are the foundation of KPMG’s Investment Practice. Through their extensive global network of KPMG member firms are able to provide dedicated resources in key major international financial centers and offshore jurisdictions that are knowledgeable in local regulations and operations.

BVI International Finance Centre BVI International Finance Centre Road Town, Tortola British Virgin Islands

Tel: +1 284 494 1509 Fax: +1 284 494 1260 info@bviifc.gov.vg www.bviifc.gov.vg Contacts

Alicia Green agreen@bviifc.gov.vg Services

The BVI has a number of clear advantages for the international business community and offers the following services: • Business Companies • Mutual Fund Registration • Management & Administration • Captive Insurance Management • Trusts and Private Wealth Management • Shipping services • Accounting and Legal Services

Professional Pages

IFC Review • 2010

CAYMAN ISLANDS

Caribbean Management Ltd 5th Floor Bermuda House Dr Roy’s Drive P.O. Box 1044 Grand Cayman Cayman Islands KY1-1102

Tel: +345 949 8728 Fax: +345 949 7325 ijohnson@gtcayman.com www.caribbeanmanagement.com Contacts

Ian R Johnson Elizabeth Ibeh Terry Carson Services

Company incorporation Registered office Secretarial and clerical services Accounting and invoicing services

Mutual Trust Cyprus Ltd 7 Heliopolis Street Ayios Andreas 1101 Nicosia Cyprus Tel: +357 22 772240 Fax: +357 22 778862 ibrooks@mutual-trust.com www.mutual-trust.com Contacts

Ian Brooks – Managing Director Ljubisa Bogunovic – Business Development Director Services

Provision of Trust and Corporate Services including: • Company Incorporations • Trust formation • Nominee services • Investment & Fund Administration • Consultancy • Office Representation • Business & Trade support • Accounting support • Banking support • Legal support

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GIBRALTAR

Capita Financial Administrators (Gibraltar) Limited Blake House,19C Town Range, Gibraltar

Tel: +350 200 43339 Fax: +350 200 49450 gibinfo@capitafinancial.com www.capitafinancial.com Contact

Karthik Iyer, Managing Director Services

Capita Financial Administrators (Gibraltar) Limited specialises in the administration of hedge funds, property and private equity funds for both Gibraltar domiciled and nondomiciled funds.

Services include: • Setting up offshore and onshore funds • Company secretarial services • Fund accounting and administration • Transfer agency /Shareholder servicing Financial Services Commission No. FSC00771B

CYPRUS

Andreas Neocleous & Co LLC Neocleous House 195 Archbishop Makarios III Avenue P.O. Box 50613 Limassol CY-3608 Cyprus

Tel: +357 25 110000 Fax: +357 25 110001 info@neocleous.com www.neocleous.com Contacts

Andreas Neocleous, Managing Partner Services

The largest law firm in Cyprus, and recognised as the market leader. Focus on providing international clients with world-class legal assistance and service.

Specialist departments provide a full service in all areas of the law.Extensive in-depth experience of cross-border investment and international tax planning.

A.K. CosmoServe Ltd 89 Kennedy Ave., 2nd Floor, Off. 201, P.O. Box 26624, 1640-Nicosia, Cyprus

Tel: +357 2237 9210 Fax: +357 2237 9212 consult@cosmoserve.com www.cosmoserve.com Contacts

Antonis Kassapis Katia Petri Services

Company formation, branch registration, corporate services, tax planning, banking services, accounting and auditing services, company redomiciliations, trust and formation services.

Christodoulos G Vassiliades & Co. Advocates – Legal Consultants LEDRA HOUSE, 15 Agiou Pavlou Street, Agios Andreas, 1105-Nicosia, Cyprus

Tel: +357 22 55 66 77 Fax: +357 22 55 66 88 www.vasslaw.com corporate@vasslaw.net info@vasslaw.net

investorseurope Offshore Stock Brokers 745 Europort, Gibraltar

Tel: +350 200 40303 Fax: +350 200 51795 info@investorseurope.com www.investorseurope.com Skype: investorseurope Twitter: @offshorebroker Contacts

Fábio dos Santos Pierre Boulle Services

Since 2001, Europe’s premier offshore stockbroker.

• Largest selection online trading platforms in the world • Numbered trading accounts: online but offshore • Stocks, CFDs, ETFs, futures and FOREX.

Your confidentiality is assured as we are an independent stockbroker incorporated within Fortress Gibraltar.

Authorised and regulated by the FSC www.fsc.gi

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GUERNSEY

Carey Olsen P.O.Box 98, Carey House, Les Banques, St Peter Port, Guernsey

Tel: +44 (0)1481 727272 Fax: +44 (0)1481 711052 info@careyolsen.com www.careyolsen.com Contacts

Russell Clark Michael Eades Services

Carey Olsen is a Channel Island full service law firm with over 135 lawyers employed across its Guernsey, Jersey and London offices. The firm’s dedicated fiduciary law group is singularly ranked in the first tier by leading legal directories. Our experts advise clients on every aspect of fiduciary law, including: creation of trusts, advice to directors, trustees and administrators; international estate planning; trustee compliance; trust litigation; employee benefit and pension schemes; wills and probate.

HONG KONG

North Asia Corporate Services Ltd Suite 1005, Albion Plaza, 2-6 Granville Road, Tsimshatsui, Kowloon, Hong Kong

Tel: +852 27241223 Fax: +852 27224373 nacs@nacs.com.hk www.nacs.com.hk Contact

Stella Ho, Managing Director Services

Ready-made/custom-made Companies & Trusts from over 20 offshore jurisdictions. Registered Office, company secretary, business address, mail forwarding. Offshore banking, accounting, L/C and trade documentation services. Customised offshore operation management.

Forming WFOE, Rep Office.

Investment Visas for Hong Kong and European countries.

IFC Review • 2010

ISLE OF MAN

HCW Fiduciaire Limited 6th Floor, Victory House, Prospect Hill, Douglas, Isle of Man IM1 1EQ

Tel: +44 1624 627335 Fax: +44 1624 627225 mail@horwath.co.im www.horwath.co.im Contacts

John Cowan Jackie Fergusson LABUAN

EC Trust (Labuan) Bhd Wisma EC Trust, UO195 Jalan Merdeka, Labuan Federal Territory of Labuan Malaysia, 87000

Tel: 6 087 453618 Fax: 6 087 453616 management@ectrustco.com www.ectrustco.com Contacts

Peter Searle, Managing Director Zainal Marsan, Chief Legal Counsel Jacy Lau, Senior Group Manager Sazali Suzin, Financial Controller Nosly Kasmani, Senior Consultant Gary Wong, IT Manager Services

• Company Incorporation.

• Provision of directors, company secretary and registered office • Settlement of Trusts.

• Trustee services.

• Private and Public Funds.

• Insurance company, insurance broker and captive insurance.

• Banking • Accounting • Legal services • Preparation and filing of company and taxation annual returns • Web Hosting and Webmail • Work Permits and Immigration • Legal, Taxation and consulting advice LUXEMBOURG

Hoogewerf & Cie P.O. Box 878, 19 Rue Aldringen, L-2018, Luxembourg

Tel: +352 460025 Fax: +352 460027 hooge@pt.lu www.hoogewerf.com Contacts

Francis Hoogewerf fca Joao Ferreira Services

• Tax consultants (cross-border) • Formation of Luxembourg • Companies • Domiciliation of Luxembourg • Companies • Speciality: holding companies in the EU • Tax structures

LUXEMBOURG

KMG SICAV-SIF S.A. 19 Rue Eugène Ruppert L-2453, Luxembourg

Tel +352 26 30 24 23 Fax +352 26 30 24 25 sicavs@kmgsicavsif.com www.kmgsicavsif.com Contacts

Kevin Mudd, Director Paul Pavli, Operations Director Services

KMG SICAV-SIF is an “open architecture platform”, created exclusively to enable third parties to launch their own fully supported and administered Luxembourg regulated SICAV SIF Funds, quickly, without the usual red tape and the costs involved both in time and money.

• Incorporation • Custody • Transfers • Administration • Domiciliation, Corporate Secretariat • Management & Organisation • Investment Management • Promotion, Distribution • Corporate Branding MALTA

Sparkasse Bank Malta PLC 101 Townsquare, IX-XATT Ta’ Qui Si Sana, Sliema SLM 3112, Malta

Tel: +356 21 33 57 05 Fax: +356 21 33 57 10 paul.mifsud@sparkasse-bankmalta.com www.sparkasse-bank-malta.com Contacts

Paul Mifsud, Managing Director Services

As a member of the Austrian Savings Banks – SparkasseBank Malta PLC forms part of a larger European banking network. The brand ‘Sparkasse’ is known to be one of central Europe’s foremost savings and financial services group.

Key services:

Private and corporate banking Wealth management Trust accounts Custody and custodian services for funds Fund administration support services Execution/settlement and custody Fund registration and re-domiciliation

Professional Pages

IFC Review • 2010

MALTA CONTINUED

Butterfield Trust (Malta) Ltd. Tel: +356 2137 8828 Fax: +356 2137 8383 malcolm.becker@mt. butterfieldgroup.com www.butterfieldgroup.com Contacts

Mr. Malcolm Becker, CEO Services

The Bank of N.T. Butterfield was established in Bermuda in 1858 and trust has been a hallmark of the relationship we have with our clients. We act as trustees and manage companies, consulting and incorporationg Maltese companies and from many international jurisdictions. Contact us for more information.

MAURITIUS

CKLB International Management Ltd 1st Floor, Felix House, 24 Dr Joseph, Riviere Street, Port Louis, Mauritius

Tel: +230 216 8800 Fax: +230 216 9800 cklbmru@cklb.com www.cklb.com Contacts

Christian Li Kathleen Lai Services

CKLB is a trust and fiduciary services company. Our range of services include company formation, corporate management, administration and accounting, fund set-up and administration, establishment of trust and provision of trustee services, and back office administration and accounting services.

11495 Commerce Park Drive Reston, VA 20191-1507 USA

Tel: +1 703 620 4880 Fax: +1 703 476 8522 corp@register-iri.com www.register-iri.com Contacts

Alison Yurovchak, Associate General Counsel Meredith Kirby, Associate General Counsel Services

International Registries, Inc. (IRI) and its group of affiliated companies are the Maritime and Corporate Administrators of the Republic of the Marshall Islands. IRI has been administering maritime and corporate registries since 1948. IRI has a network of offices in Baltimore, Dalian, Dubai, Ft. Lauderdale, Geneva, Hamburg, Hong Kong, Houston, Istanbul, London, Mumbai, New York, Piraeus, Roosendaal, Seoul, Shanghai, Singapore, Tokyo, Washington, DC/Reston and Zurich that have the ability to incorporate a company, issue company related documentation, register a vessel or yacht, and service clientele.

NZ Securities Trusts P.O. Box 32528, Auckland , New Zealand.

Level 1, 412 Lake Road, Takapuna, Auckland

Tel: +64 9 4899453 Fax: +64 9 4899452 info@nzsecurities.com www.nzsecurities.com Contacts

Garth Melville or Carolyn Gee

Asiaciti Trust New Zealand Limited Plaza Level, 41 Shortland Street, P.O. Box 1194, Shortland Street, Auckland, New Zealand

Tel: +64 9 302 0140 Fax: +64 9 302 0150 new_zealand@asiacititrust.com www.asiacititrust.com Contacts

Sam Ruha, General Manager Lauren Williams, Senior Legal Counsel Services

MARSHALL ISLANDS

International Registries, Inc. (IRI)

NEW ZEALAND

NEVIS

Tarsus Trust Company P.O. Box 11, Main Street, Charlestown, Nevis, W.I.

Tel: +1 869 469 4602 Fax: +1 869 469 4603 info@tarsustrust.com www.tarsustrust.com Contacts

Thomas E Ferneau III , Esq June Hanley L Burke Files Services

Tarsus supports international financial experts and multinational financial planners with current information, custom products and services. We back you so you can back your clients. Look to us for mutual funds, insurance companies, Custom International annuities, entity formation and more.

• Trustee services • Fiduciary services • Managed trust companies • Private trust companies • Limited liability partnerships SAMOA

Samoa International Finance Authority (SIFA) Tel: +685 24071 Fax: +685 20880 intlbusiness@sifa.ws or offshore@lesamoa.net www.sifa.ws Contacts

Erna Va’ai, Chief Executive Officer Mr. Cheshire Malua, Assistant Chief Executive Officer Mrs Sieni Voorwinden, Assistant Chief Executive Officer Services

Registration of international companies, trusts, partnerships and segregated funds and licensing of trustee companies, international banks, insurance companies, mutual funds and fund managers.

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SEYCHELLES

Seychelles International Business Authority (SIBA) P.O. Box 991 Victoria, Bois de Rose Avenue, Roche Caiman, Mahé, Seychelles

Tel: +248 380 800 Fax: +248 380 888 enquiries@siba.net www.siba.net Contact

Steve Fanny (msc, ifa, Ad Dip Acc (cima), mabe, acfe), Managing Director and Chief Executive Officer Services

• Regulatory authority • International Business Companies Act • International Trust Act • International corporate service providers Act • Companies (Special Licenses Act) • Protected Cell Companies Act • Limited Partnerships Act • Seychelles Foundation Act • Securities Act • Mutual Fund and Hedge Fund Act

Sast Offshore Services Ltd Suite 14, 1st floor, Trinity House, Victoria, Mahe, Seychelles.

Tel: +248 226111; +248 323944; +248 579348 Fax: +248 324226; +248 226111 sast@seychelles.net offshore@seychelles.net Contacts

David J Lowseck Managing Director

IFC Review • 2010

Mayfair Trust Group Limited 2nd Floor, Capital City Independence Avenue P.O. Box 1312 Victoria, Mahé Seychelles

Tel +248 438888 Fax +248 438800 info@mayfair-offshore.com www.mayfair-offshore.com Contacts

Peter Burian (Managing Director) Gemma Mein (Corporate Services Director) Tania Benoiton (Technical Director) Services

Mayfair is one of the leading corporate, trustee and foundation service providers in Seychelles.

We can assist with the formation and administration of Seychelles tax exempt IBCs, tax resident CSLs, trusts, foundations, limited partnerships, mutual fund formation and arranging related legal services.

ST VINCENT AND THE GRENADINES

Invest SVG 2nd Floor, Administrative Building, P.O. Box 2442, Kingstown, St. Vincent & the Grenadines

Tel: +1 784 457 2159 Fax: +1 784 456 2688 info@investsvg.com www.investsvg.com Contacts

Cleo Huggins, Executive Director (Ag.) Tonya Fraser, Marketing Officer Services

Invest SVG is the investment catalyst for Saint Vincent & the Grenadines (SVG) in a range of sectors including IFS. Our services include policy advocacy, application/permit processing, marketing and network support, among others. We work alongside the International Financial Services Authority to make SVG a successful IFC jurisdiction. www.investsvg.com VANUATU

SINGAPORE

Asiaciti Trust Singapore Pte Ltd Asiaciti Corporate Services Pte Ltd, Asiaciti Management Pte Ltd 163 Penang Road, No. 02-01 Winsland House II, Singapore 238463

Tel: +65 6533 2611 Fax: +65 6532 5092 Singapore@asiacititrust.com www.asiacititrust.com Contacts

Graeme W Briggs, Group Managing Director Angela Nicolson, Managing Director Singapore Services

Formation and management of Singapore companies including international holding companies; trustee services for Singapore and foreign trusts; formation and administration of offshore companies in all jurisdictions, strategic planning services to private and corporate clients for offshore trust, international tax and asset protection. Member of the Asiaciti Trust Group with offices in Cook Islands, Hong Kong, New Zealand, Samoa and Uruguay.

Vanuatu Financial Services Commission (VFSC) Companies House, Rue Bougainville PMB No. 9023, Port Vila, Rep. of Vanuatu

Tel: +678 22 247 Tel: +678 22 242 info@vfsc.com.vu gandrews@vfsc.com.vu sobed@vfsc.com.vu www.vfsc.vu; www.insurance.vu Contacts

George Andrews, Commissioner Serah Obed, Deputy Commissioner Services

Company formation including: local; overseas, international; protect cell and incorporated cell companies. Registration of business names, registration of charitable organizations, registration of UK patents and trademarks, registration of credit unions, registration of trade unions, licensing of insurers and intermediaries, licensing of trust companies and principals, licensing of mutual funds and administrators, licensing of security dealers and principals, controller of stamp duties and personal property securities, corporate liquidation and insolvencies.

www.ifcreview.com

78 York Street, London W1H 1DP • Tel: +44 (0) 20 7692 0932 • Fax: +44 (0) 20 7692 0933 Email: info@ifcreview.com • Website: www.ifcreview.com